Good news current account deficit cheers bond market

By Brian Fallow


WELLINGTON - The current account deficit - the difference between what we earn from the rest of the world and what it earns from us - turned out better than expected for 1998.

The deficit of $5.9 billion was down from $6.4 billion in the year to September, and better than the market expectations which were clustered around $6.7 billion. It is equivalent to 6 per cent of gross domestic product - the best that ratio has been for 18 months.

"However, with the exception of the positive impact of tourism, we believe this is yet again an improvement largely for all the wrong reasons." ANZ chief
economist Bernard Hodgetts said.

The main factor in reducing the deficit was weaker earnings from foreign-controlled companies in New Zealand, reflecting the weaker economy last year.

Coupled with reduced debt-servicing costs (from lower interest rates) and a better performance from New Zealand owned assets abroad, the upshot was a smaller negative balance on investment income, which is always the biggest drag on the current account.

Net investment income was $1.51 billion in the red in the December quarter, making $6.73 billion for the year, compared with deficits of $1.87 billion and $7.14 billion respectively in September.

The trade balance, however, deteriorated. The annual trade surplus was $1.57 billion, down from 1.63 billion in September.

Mr Hodgetts said that recent trade data showed no signs that the deteriorating trend in the trade surplus was about to turn around. "Since the long-term health of the current account depends crucially on the trade balance, limited comfort can be had form today's results," he said.

The balance on services improved slightly, from an annual deficit of $1.57 billion to $1.53 billion as inbound tourism held up better than expected following the Asian financial crisis.

The transfer balance also improved, to $781 million from $642 million in annual terms, largely because of increased withholding tax payments.

Bankers Trust chief economist David Plank said the better-than-expected result would remove some of the risk premium from New Zealand assets. The bond market rallied on the news.