NZ reports massive balance of payments deficit

The value of exports is down.

New Zealand had a monster $3.09 billion balance of payments deficit in the September quarter, Statistics New Zealand (SNZ) reported today.

Although the seasonally adjusted quarterly deficit was not as dire as economists' $3.5 billion forecast, the September year deficit of $8.23 billion was much worse than their $7.18 billion estimate.

The deficit on the balance of payments, also known as the current account -- measuring New Zealand's financial dealings with the outside world including trade and invisibles such as debt payments -- was the worst in dollar terms since SNZ began the current series in 1987. It has been worse as a percentage of GDP.

Not adjusting for seasonal variations, the deficit was even worse -- $4.22 billion, compared to $1.80 billion in the June quarter. The annual deficit represents 5.8 per cent of New Zealand's Gross Domestic Product -- far worse than economists had expected. It was only 4.8 per cent of GDP in the June quarter.

The Reserve Bank had expected the deficit to balloon out to over 6 per cent of GDP but not until around early 2006. The ratio to GDP number is the worst since September 2000.

News of the poor number may result in a reversal of the New Zealand dollar's relentless upward march as international investors think twice before further underwriting New Zealand's spending spree.

Ironically, the deficit comes at a time when New Zealand's terms of trade are at a 30-year high.

SNZ said lower exports of goods combined higher income in the form of profits and interest payments earned by foreign investors in New Zealand were the main culprits in the widening deficit.

There was a $949 million fall in the value of goods exports in the quarter mainly due to a significant fall in export volumes. All the main categories recorded decreases in export volumes in the quarter, led by dairy with a massive 26.8 per cent slide.

There was a $101 million increase in seasonally adjusted services exports with spending by overseas tourists here the main contributor. A fall in the number of tourists was more than offset by an increase in average spending per tourist.

Higher dividend payments by foreign owned New Zealand companies resulted from higher profits. Three quarters of the higher profits were reinvested in New Zealand.

As a result of the persistent current account deficit, New Zealand's net foreign debt position has swollen by $7.5 billion in the quarter to $118.2 billion. The debt has grown by $11 billion over the year.

Some $2.6 billion of the increased debt in the September quarter was the result of valuation changes as a result of the New Zealand dollar rising. However, the most significant cause of the rise, was a net flow of investment into New Zealand of $4.9 billion.

Foreign investment into New Zealand mainly comprised funding of domestic banks and increase in the level of foreign holdings of New Zealand Government bonds and securities.

This foreign investment into New Zealand of $13.4 billion more than offset the $8.5 billion of New Zealand investment abroad during the quarter. The increase in New Zealand investment abroad was mainly from domestic banks lending abroad and a rise in official reserve assets.

The New Zealand dollar fell to US71.30c from its US71.70c opening on the news.

BNZ economist Craig Ebert said the size of the deficit accentuated the risks that New Zealand's long running economic expansion would end.

"And you may well see it start to weigh on the NZ dollar before too long.

"If it says anything about (interest) rates, it's that they're hardly high. There's a big imbalance developing between real exports and real imports, and that to us is a sign of quite overheated demand. The idea that they should go lower next year seems to us a very faint hope of some."

Westpac chief economist Brendan O'Donovan said much of the deficit was due to the very strong domestic economy and the strong profitability of foreign-owned New Zealand companies.

"But it doesn't get away from the fact that it's a pretty big and ugly current account deficit."

He expects the deficit to swell to 6.5 to 7.0 per cent of GDP by the middle of next year.

- NZPA