Wide current account deficit a risk to NZ credit rating, ANZ says

Stats NZ has released current account data for the March year.

New Zealand’s current account deficit improved a touch in the March year, but ANZ economists say it is still too wide and remains a risk to the country’s sovereign debt rating.

Stats NZ said the current account shortfall came to $27.6 billion (6.8 per cent of GDP) in the March year, compared with a $27.9b deficit (6.9 per cent of GDP) in the December 2023 year.

A current account deficit indicates New Zealand is spending more than it is earning overseas.

ANZ economists said the data showed New Zealand’s external position was improving, but that it was still “too far out of balance” to call sustainable.

“Progress is expected to continue, but the economy remains vulnerable to a wide range of possible shocks such as drought or global wobbles that could keep us in unsustainable territory for longer,” the bank said in a commentary.

“Combined with a soft growth outlook and wider-for-longer fiscal deficits, risks to our sovereign credit rating are building,” the bank said.

The size of the current account balance, in relation to GDP, shows its significance in the context of New Zealand’s overall economy.

Ratings agency S&P Global was not immediately available for comment on the data but said after last month’s Budget that an anaemic economy and forecasts for subdued tax receipts were further delaying New Zealand’s post-Covid recovery.

“We still expect the country’s fiscal deficit to gradually narrow over the next few years, though net general Government debt could stabilise at a higher level than we previously predicted,” S&P said at the time.

S&P said its current ratings reflect New Zealand’s strong institutional settings, monetary policy flexibility, and relatively wealthy economy.

“The country’s public debt burden is mid-range, while external imbalances remain the key risk to the sovereign credit profile,” it said.

BNZ economists said the annual deficit was meaningfully smaller than the 8.8 per cent high point in 2022.

“The deficit is smaller than it was, but it is still relatively large,” BNZ said.

“We suspect that combined with weak economic growth, the deficit will remain on the radars of rating agencies.”

In its data release, Stats NZ said the seasonally-adjusted current account deficit widened by $0.3b to $7.3b in the March quarter.

The quarterly seasonally-adjusted services deficit widened by $1.1b.

Services exports fell $0.9b, driven by travel exports - spending by overseas visitors while in New Zealand.

“In the March 2024 quarter, the seasonal peak in visitor spending was less pronounced than it has been in the past,” Stats NZ’s institutional sectors senior manager Paul Pascoe said.

“Once seasonal factors were removed, the adjusted visitor spending fell,” he said.

The March quarter adjusted goods deficit narrowed by $0.4b, driven by a $1.0b increase in goods exports.

Fruit, dairy, logs and wood products were the main contributors.

Goods imports also increased by $0.6b.

“Even though the goods deficit narrowed slightly this quarter, goods, services and primary income have all been in deficit since the December 2020 quarter,” Pascoe said.

The primary income deficit narrowed by $0.5b to $3.0b.

A primary income deficit shows New Zealanders earned less from their investments overseas than overseas investors earned from their investments in New Zealand.

Stats NZ said as at March 31, 2024, New Zealand’s net international investment liability position was $199.1b or 48.7 per cent of GDP.

That was $11.2b narrower than the $210.3b (52.0 per cent of GDP) it was three months earlier.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.