Kiwi dollar jumps as current account deficit shrinks

Photo Kenny Rodger.

New Zealand's current account deficit shrank markedly in the June quarter, as foreign-owned banks saw their profits dwindle, Statistics New Zealand reported today.

For the year ended June the current account deficit was $10.6 billion, or 5.9 per cent of GDP, compared with $14.6b (8.1 per cent of GDP) for the year ended March 2009.

This is the smallest year ended deficit as a percentage of GDP since September 2004.

The figure, also known as the balance of payments, measures all of New Zealand's dealings with the outside world. The New Zealand dollar jumped from around US70.62 cents to US71.42c on the news this morning.

Analysts in a Reuters poll had on average forecast a annual deficit of $13.04 billion, with a quarterly shortfall of $1.72b.

The seasonally adjusted current account deficit was $612 million in the June quarter, $1.5b smaller than the March 2009 quarter deficit of $2.12b, Statistics New Zealand said.

The smaller deficit was due to a fall in income from foreign investment in New Zealand. Imports of services also fell, while the surplus on goods remained unchanged.

ASB chief economist Nick Tuffley said the BNZ's $661million tax provision for its structured finance tax case flowed straight through into the balance of payments.

"Over the past year, the sharp drop in imports has more than offset the smaller decline in exports. The decline in imports was broad-based, reflecting the deterioration in domestic demand over the past year."

"NZ's current account deficit has headed in the right direction in recent quarters, though got a lot of help from BNZ's huge tax provision," said Tuffley. "Some of the recent drivers have been positive, such as lower debt-servicing costs. However, many have reflected the trials and tribulations the local economy has experienced."

Dairy export volumes have recovered from drought-hammered levels. Imports and income earned on foreign investment in New Zealand have been weak because the economy has been deep in recession."

Bernard Doyle, NZ strategist at Goldman Sachs JBWere said today's result was "a significant positive surprise that has been positively received by the New Zealand dollar."

"While the improvement in the current account is pleasing, the nature of the recovery gives us little confidence in its sustainability. Aside from the tax transaction, the bulk of the improvement is due to lower profits from the banking sector and low interest rates applied to NZ's international liabilities," said Doyle.

Both of these would normalise as financial market conditions improve.
"Sustainable improvement in NZ's external position will need to be driven by goods and services trade surpluses. With the domestic economy in recovery and the New Zealand dollar rising, the prospect of this remains distant," he said.

Income from foreign investment in New Zealand, not seasonally adjusted, fell by $1.186b in the June quarter, to $2.07b, its lowest level since the March 2001 quarter.

"The fall was driven by lower profits earned this quarter by foreign-owned New Zealand enterprises, particularly in the banking sector," said government and international accounts manager John Morris.

The fall was influenced by a large company tax transaction during the quarter.

Exports of goods fell $771m, mainly due to falling prices (especially for dairy products), which more than offset an increase in export volumes.

Goods imports fell $772m as both prices and volumes of imported goods decreased.

In actual dollar terms, the current account balance was a surplus of $124m in the June 2009 quarter. The most recent surplus was in the March 2003 quarter - June quarter surpluses are unusual.

If the effect of the company tax transaction affecting investment income were removed, there would be a deficit of $537m.

At June 30, New Zealand's liabilities exceeded its assets by $171.6b.

In dollar terms, this is the first decrease since the March 2006 quarter.

- NZPA