Earnings gap starting to grow

By BRIAN FALLOW economics editor

The current account deficit widened in the December quarter as exporters found the going tougher and overseas tourists stayed home.

It was the second quarter in a row to show an increase in the deficit, which measures the difference between what New Zealand earns from the rest of the world through trade and investment and what the world earns from us.

However the annual tally was better with the $3.8 billion deficit for the year to December amounting to 3.2 per cent of gross domestic product, the lowest level since September 1993 and well below the peak of 7 per cent reached in March 2000.

Deutsche Bank chief economist Ulf Schoefisch expects the deficit to widen to 4.5 or 5 per cent of gross domestic product over the course of this year as import growth, fuelled by a strong domestic demand, outstrips export volume growth and commodity prices fall.

Schoefisch expects the trade surplus ($3.5 billion last year) to halve this year.

Statistics New Zealand said that the seasonally adjusted balance on goods and services fell to $349 million in the December quarter from $971 billion in September. The balance for goods was hit by both lower export volumes and lower prices, and that for services by the drop in visitor arrivals after September 11.

The investment income deficit widened to $1.8 billion from $1.7 billion in the September quarter.

Improved returns from New Zealand investment abroad were more than offset by a $219 million increase to $2.26 billion in the amount foreign investors earned in New Zealand.

The investment income deficit reflects the cost of servicing $169 billion worth of foreign investment in New Zealand, against the returns on the $79 billion New Zealanders have invested overseas. This imbalance will keep the current account balance permanently in the red, regardless of the trade cycle.

But the owners of the foreign direct investment component of the figures are evidently feeling more confident, as they reinvested $1.5 billion of their profits last year.

Of the $3.79 billion in profits earned by foreign-owned companies in New Zealand last year, $2.33 billion was paid out in dividends.

That represents a payout ratio of 61 per cent, the same as in 2000 but well below the average 94 per cent payout of the two previous years.

Schoefisch said a recovery in export volume growth and in the terms of trade next year should stop the current account deficit from slipping below 5 per cent of gross domestic product.

He said its long-run trend was likely to be around 4 per cent.

Another indicator of the affordability of New Zealand's external indebtedness is continuing to improve. The ratio of debt service costs to exports of good and services now stands at 11.3 per cent compared with a peak of 18.3 per cent four years ago.

In other words it would take six weeks' worth of export income to pay the interest bill to overseas lenders, compared with 10 weeks four years ago.