Deficit swells to $6.4 billion

By BRIAN FALLOW


New Zealand's current account has swung deeper into the red.

For the year ended June, it was $6.4 billion, equivalent to 4.6 per cent of gross domestic product, worse than the $5 billion to $6 billion economists had forecast.

It is an increase from 4.4 per cent of GDP in the year to March, but is in line with the average over the past 10 years.

The current account measures the difference between what New Zealand earns through trade, tourism and investment from the rest of the world and what it earns from New Zealand in return.

Like the ozone hole, it is out of sight and out of mind, but could be dangerous if it keeps growing.

Credit rating agency Standard and Poor's implied as much even as it reaffirmed New Zealand's AA+ rating last week, pointing to the continued dependence on foreign lenders as a source of vulnerability.

"Any souring of investor sentiment towards New Zealand could force difficult economic adjustments on the country," said S&P analyst Brian Flynn.

New Zealand was more vulnerable than other countries with high levels of external indebtedness, such as Australia and the United States, because its economy was more narrowly based and it was distant from world markets.

Deutsche Bank chief economist Ulf Schoefisch expects the current account deficit to widen gradually to about 5.5 per cent of GDP in the next two years.

That is based on imports continuing to grow faster than exports and export prices falling relative to import prices, and on rising interest rates putting upward pressure on the investment income balance.

But the National Bank, which also expects a deterioration to 5.5 per cent of GDP, does not expect it to register on overseas investors' radar.

"US trade developments are likely to remain the key for currency direction, not merely reflecting the size of the US deficit relative to GDP but the pure dollar amount which exceeds $1.6 billion a day," said National Bank economist Cameron Bagrie.

The deficit grew as imports swelled as a result of booming consumption and business investment, and as the profits of foreign-owed businesses climbed.

But Finance Minister Michael Cullen took comfort from the fact that a higher proportion of the profits of foreign-owned companies was reinvested.

Investment income accruing to the owners of foreign direct investment (FDI) in New Zealand jumped from $1.1 billion in the March quarter to $1.6 billion. That explained most ($453 million) of the $554 million deterioration in the overall current account between the two quarters.

But the proportion reinvested jumped from 60 per cent to 70 per cent, as $1.1 billion was reinvested, up from $673 million in the March quarter.

The other big contributor to the wider deficit was the balance on goods.

It deteriorated from a $68 millon surplus, seasonally adjusted, in March to a deficit of $244 million.