Deficit a precursor of 'unsustainable' debt levels

Source: Statistics New Zealand. GSJBW Research estimates. Herald graphic.

The rising fuel bill and the nationwide splurge on housing and consumer goods have pushed the annual current account deficit to a record $14.5 billion.

The country's worsening debt position, up from $13.7 billion for the December year, prompted international ratings agency Standard & Poor's to say the "chronic" current account deficit position was "high and unsustainable", placing pressure on the country's credit rating.

The current account, also known as the balance of payments, measures all of the country's dealings with the rest of the world.

As a proportion of the entire economy's output, the March year current account deficit is now equal to 9.3 per cent of gross domestic product, the third highest in the OECD behind Iceland and Portugal and ahead of market and Reserve Bank forecasts.

It is now at its highest level since it peaked at 13 per cent in 1975 after the seventies oil shock.

ANZ economists now believe the deficit will reach 9.5 per cent of GDP, while the BNZ expects it to hit 10 per cent.

"The 6 per cent mark is normally where people start to get nervous," said BNZ's Craig Ebert.

"Beyond that there's a sense that it's unsustainable, that you're just going to go further and further into debt to the rest of the world and something has to give."

Aside from a worsening trade deficit as higher oil prices undercut modest gains from the still sluggish export sector, the investment income component lurched deeper into the red.

It was weighed down by interest payments on the billions of dollars owed to overseas creditors after the recent splurge on housing and consumer goods.

While global interest rates have risen in recent months, "the bulk of the increased interest payments to foreigners undoubtedly reflects the sheer increase in funding from abroad, as New Zealand consumers have leveraged into the overvalued housing market," said Ebert.

Reserve Bank data released yesterday also showed robust ongoing growth in credit card debt.

The average daily total owed by all New Zealanders on credit cards in April was $4.29 billion, up 7 per cent on the same month a year ago.

Standard & Poor's said the current account deficit presented "ongoing contingent risk" to the Government.

"This relates to pressure the Government may face to assist borrowers if they suffer financial distress, as well as any wider impact on the economy from a major downturn in activity," said credit analyst Kyran Curry.

Standard & Poor's regarded the deficit as "high and unsustainable" and as such it placed pressure on New Zealand's credit ratings.

The Government's "steady course of fiscal discipline" remained a critical factor in mitigating the effects of the country's high external debt and maintaining its AA+ foreign currency rating, said Curry.

Standard & Poor's said the current account deficit may gradually narrow as the effects of the weaker New Zealand dollar stimulate export growth and trim the local appetite for imports.

"But New Zealand has a significant way to go before its current account deficit and foreign debt levels recede to more sustainable levels."