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Annual current account deficit helped by reinsurance flows

Wednesday 23rd March 2011

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The current account deficit, which measures international trade and services flows, is improving because of inward flows from international reinsurers after Canterbury's earthquakes, but it will again blow out, economists said today.

The current account deficit stood at 2.3% of gross domestic product (GDP) in the year to December. The deficit has improved from 8.8% of GDP in 2008.

ANZ said that an annual current account surplus for the first time since the early 1970s is in prospect in March when $6 billion of reinsurance inflows from the February 22 earthquake will lead to a large quarterly current account surplus.

Statistics New Zealand (SNZ) today revised its estimate of expected reinsurance claims for the September 2010 quarter from $1.7 billion to $3.6 billion after receiving updated information from the insurance industry for the September earthquake.

The current account deficit in the year to December was 4.1% of GDP when reinsurance claims from the September earthquake are excluded.

SNZ today put the seasonally adjusted current account deficit for the December quarter at $2.81 billion, and the actual current account deficit for the quarter at $3.52 billion.

This was wider than the market was expecting and the NZ dollar fell on the news but quickly recovered.

The seasonally adjusted quarterly deficit compared a surplus of $1.7 billion in the September quarter.

"One-offs continue to flatter the external position. First it was the judgments against the banks, for structured tax transactions, now it is reinsurance inflows from the Canterbury earthquakes. The high terms of trade are also providing a supporting role," ANZ said.

"These will be short-lived with the current account set to move back into the red, with the annual deficit approaching 5% of GDP by late 2012."

ASB said the deficit in the December quarter excluding one-off factors was surprisingly large and ratings agencies would continue to focus on the underlying trend.

"Nevertheless, on balance we do not expect a ratings downgrade: the upcoming May 19 budget will be the pivotal event in that regard. And, encouragingly, New Zealand's underlying net international investment position has continued to improve, continuing the steps towards reducing New Zealand's financial vulnerability," ASB said.

SNZ said that excluding the overseas reinsurance claims, the December quarter seasonally adjusted deficit rose $990 million from the September quarter.

The main reason was an increase in income from foreign investment in New Zealand, largely because profits earned by foreign-owned corporates rose.

There was also a smaller surplus on trade in goods and services in the latest quarter. Imports of goods increased, due to several high-value vessels and aircraft being purchased during the quarter.

Spending by overseas tourists fell to its lowest level in nine years, with falls in both the number of visitors and their length of stay.

The current account deficit is a measure of trade and capital flows. Tomorrow, Statistics NZ is releasing GDP data for the December quarter.



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