Foreign debt mountain grows

By BRIAN FALLOW economics editor

The gap between what New Zealand earns from the rest of the world and what it spends widened to $6 billion in the year to September.

It is the biggest current account deficit for three years.

The balance of payments for goods, usually in surplus, had a $500 million deficit in the latest year as a buoyant domestic economy sucked in imports and exporters struggled with sluggish world growth and a sharply rising exchange rate.

The balance on services (tourism and travel) remained more than $1 billion in the black for the year.

But the surplus in the latest quarter was only $43 million, seasonally adjusted. Statistics New Zealand said that while there were more inbound tourists, they did not stay as long, and more New Zealanders travelled overseas and for longer.

The investment income account had a $6.8 billion deficit for the year.

But a growing proportion of the profits earned on foreign direct investment is being retained in New Zealand, rather than being paid out in dividends.

Adjusting for that, and the equivalent effect in New Zealand's more modest FDI abroad, the investment income deficit would be $2 billion lower.

Economists estimate the $6 billion current account deficit equates to 4.6 or 4.7 per cent of gross domestic product. That would be little changed on three months ago, and in line with the 10-year average.

But the cumulative effect of such deficits is reflected in New Zealand's net debtor position of $102 billion or 79 per cent of GDP, a very high ratio by international standards.

Economists expect the current account deficit to get worse before it gets better.

Treasury forecasts yesterday predicted it would widen to 6 per cent of GDP by 2005 and stay above 5 per cent for the three years beyond that.

At those rates, the stock of foreign claims on the New Zealand economy would be growing faster than the economy itself, measured in nominal GDP.

The state of New Zealand's external accounts is expected to pull the exchange rate lower - eventually.

But ANZ economists say the effect on the currency depends in part on how the deficit is funded.

Currency flows associated with debt financing tend to be hedged, resulting in no net demand for the currency, but equity funding is usually unhedged, often being as much a punt on the country as the company.