KEY POINTS:
The deficit in New Zealand's dealings with the rest of world widened in the last three months of last year, pushed up by bigger profits for foreign-owned companies, especially banks.
The current account deficit - the gap between what the country earns from the the rest of the world through trade, services and investment and what the rest of the world earns from New Zealand - was $3.54 billion in the December quarter, seasonally adjusted, up from $3.2 billion in September.
That took the deficit for the full year to $14.4 billion, equivalent to 9 per cent of gross domestic product.
That is an improvement from the peak of 9.7 per cent recorded in last year's June quarter, but it is still well above the level considered sustainable.
The lion's share of the deficit - $12.1 billion of the annual total - is the investment income deficit, which is the cost of servicing nearly a quarter of a trillion dollars worth of foreign lending to and investment in the economy, offset by what New Zealand investors earn abroad.
The net liability of $143 billion equates to $34,000 for every man, woman and child, and servicing that debt costs 7.5 per cent of GDP, the equivalent of the economy's entire output every February.
In the December quarter, the investment income deficit was $3.1 billion, the biggest part of which was the $1.94 billion made by foreign-controlled companies in New Zealand.
That was an increase of $294 million on September, mainly in banking, Statistics New Zealand said.
Last year, the banks' net borrowing overseas increased by $20 billion.
In the December quarter, the balance of trade in goods deteriorated by $82 million to a $792 million deficit, offset by a $123 million improvement (to $134 million) in the balance on services such as tourism.
Goldman Sachs JB Were economist Bernard Doyle said that while the current account deficit could still be easily financed by foreign investors chasing yield, the medium-term issues were challenging.
The main issue was that much of the economy's recent strength had been financed by credit from overseas which had been invested mainly in housing, a non-productive asset class.
So the inflow of capital was not improving New Zealand's ability to repay its debt.
ANZ National bank chief economist Cameron Bagrie said the full-year deficit, at 9 per cent of GDP, was unsustainable. While it should continue to improve, it would be a slow hard grind with the dollar as high as it was.
"The fact that the [annual] deficit is at least moving in the right direction, and most of this improvement has come from the goods balance, is mildly comforting.
"The strong rise in main export commodity prices has more than offset the rise in the New Zealand dollar."
But with global interest rates set to rise and domestic rates set to stay high for some time, a material improvement in the investment income deficit was not likely soon,.
The investment deficit isn't helped by the fact that New Zealanders investing abroad manage less than half the return on investment that inbound investors achieve.
Bagrie believes credit rating agencies will remain unconcerned by the deficit, partly because the trend is improving and partly because the Government's financial position is strong.
Finance Minister Michael Cullen said while the Government had been saving, households had been borrowing more to finance consumption.
The country's net international debt of $143 billion was equivalent to 89 per cent of GDP, compared to 62 per cent of GDP in Australia.
The difference could partly be attributed to Australia's more active policies to encourage savings.
"If we are to own more of our own assets we must save more," Cullen said. "And if we are to help New Zealand companies invest for expansion we must save more."
The Figures
Current account deficit
*Year to December 2006: $14.4b
*Year to September 2006: $14.5b
International investment position
*Investment in NZ: $247b
*NZ investment abroad: $104b
*Net debt: $143b (89% of GDP)
