Deficit creeps to 7-year best

By BRIAN FALLOW

Buoyed by a strong export performance, New Zealand posted its best balance of payments figures for seven years in the year to September.

But analysts think that is about as good as it will get.

The current account deficit - the gap between what New Zealand earns from the rest of the world through trade and investment and what the world earns from us - was $1.7 billion in the September quarter, in line with market expectations.

The deficit shrank from $4.5 billion in June to $3.9 billion, equivalent to 3.4 per cent of gross domestic product.

It is the lowest that ratio has been since 1994 and less than half its peak - a menacing 7 per cent - 18 months ago.

Westpac economist Nick Tuffley said the goods and services surplus over the year equated to 3 per cent of GDP, the best performance for nine years.

"However, that performance is reaching the final act," he said. "Next year is when New Zealand will most feel the big chill of slowing global growth."

Export commodity prices had already begun falling and would fall further next year.

"Export volume growth will come to a standstill. At the same time increased reliance on domestically generated growth will maintain or even expand demand for imports."

In the year to September, inbound tourism was worth around $2 billion more than New Zealanders spent travelling abroad.

But the aftermath of the September 11 terrorist attacks is expected to shrink that contribution to the current account.

The investment income balance was a deficit of $1.7 billion for the quarter, making $7.7 billion for the year.

It was the lowest quarterly deficit since June 1999, Statistics New Zealand said.

The investment income deficit reflects the cost of servicing $166 billion of foreign investment in New Zealand, offset by the returns on the $78 billion New Zealanders have invested overseas.

"The result is New Zealand will continue to run structural current account deficits for the foreseeable future, and deficits averaging around 4.5 or 5 per cent of GDP will be normal," Mr Tuffey said.

But with nominal GDP growing at around the same rate, the ratio of net debt to GDP would remain broadly stable, so deficits of that order should not be of concern to the financial markets.

Another measure of how sustainable the external accounts are is the ratio of debt servicing costs to exports of goods and services.

Three years ago it took nine and a half weeks' worth of exports to pay the interest on New Zealand's overseas debt. That has now fallen to less than six weeks.

Mr Tuffley expects the effects of global recession on trade and tourism to push the deficit to more than 5 per cent of GDP by the end of next year.

Deutsche Bank chief economist Ulf Schoefisch expects the deficit to fall below 3 per cent of GDP when the December figures are released.

But that would be with a lower December quarter deficit this year replacing a high December quarter last year in the annual number.

He believes that in quarterly terms, the deficit has already bottomed.

But although he expects weaker commodity prices and lower export volume growth to widen the current account deficit again next year, Mr Schoefisch thinks that trend will be modest enough to keep it below 4 per cent over coming years.

That would be evidence of a structural improvement in New Zealand's external accounts and the significant downward adjustment of the real exchange rate.