We're nearly paying our way in the world

By BRIAN FALLOW

New Zealand is the closest it has been for 13 years to paying its way in the world.

The current account deficit - the difference between what we earn from the rest of the world through trade, tourism and investment and what the rest of the world earns from us - shrank to $2.7 billion in the year ended March.

The previous year it was $5.3 billion, and $7.1 billion the year before that.

In the past year the trade surplus improved $900 million, aided by a weak dollar and strong commodity prices.

The services balance, mainly tourism and travel, shrugged off the September 11 terrorism atrocities and improved $700 million.

The investment income balance improved $1.2 billion on the previous year, not least because Air New Zealand stopped haemorrhaging money across the Tasman.

People who spend more than they earn have to find the difference by running up debts or selling assets. New Zealand has had to do the same, importing capital to finance the current account deficit.

The cumulative effect of years of deficits is $170 billion of foreign investment in New Zealand, which is $93 billion more than New Zealanders have invested overseas.

Servicing those obligations means that about $8.5 billion of what we produced last year belonged to foreign investors, offset by $2 billion earned by New Zealand investment abroad.

So lower interest rates helped last year - when you are up to your neck in debt, the smaller the waves the better.

But that was then and this is now. World interest rates will not stay this low for ever.

Also, since the end of March the New Zealand dollar has climbed 5 per cent on a trade-weighted basis.

Eventually the stronger dollar will push the current account deficit up again, as exports become less lucrative and imports cheaper.

New Zealand will look less desirable as a tourist destination, while foreign travel becomes cheaper to New Zealanders.

Business confidence is already back in negative territory, with pessimists outnumbering optimists for the first time since October and November last year (in the wake of the September 11 attacks).

Concerns are mounting about how high interest rates and, even more worrying, the dollar may go. But the current account data shows one sign of commercial confidence.

In the past four years the proportion of the profits of foreign-owned companies that get reinvested has climbed.

Of the $7 billion in profits those companies earned in the past two years, $2.4 billion or 34 per cent was reinvested. The rest was taken out in dividends.

In the two years before that, the profits were almost the same - $6.95 billion - but only 5 per cent was reinvested here.