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Strong tourism, low rates keep lid on NZ current account deficit

Wednesday 18th September 2019

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New Zealand's persistently strong tourism market and low global interest rates have helped keep a lid on the current account deficit and may continue to do so during the next year and a half. 

The annual current account deficit was $10.23 billion in the June quarter, narrowing from $10.8 billion in March quarter, Statistics New Zealand figures show. At 3.4 percent of gross domestic product, that was in line with economists' expectations and down from 3.6 percent in March. 

The balance of payments - which captures trade in goods and services and net income flows - has been buoyed in recent years by the country's tourism boom stoking the services side of the ledger, while low interest rates have reduced the cost of locals borrowing from overseas lenders.

That's offset the increased demand for imported goods from an expanding population that would typically push up the deficit. 

ANZ Bank New Zealand economist Miles Workman said the composition has shifted from the historical norm, with a goods deficit of 1.3 percent of GDP compared to a long-run average of 0.8 percent, a services surplus of 1.4 percent compared to 0.8 percent, and an income deficit of 3.5 percent compared to 5.1 percent. 

Stats NZ said the seasonally adjusted current account deficit was $2.38 billion in the three months ended June 30, narrowing from a shortfall of $2.52 billion in March. 

"The goods and services balance came in very close to our expectation, but the income deficit was narrower," Workman said. 

Investors largely ignored the data, with the kiwi dollar recently trading at 63.43 US cents. from 63.57 cents immediately before the release. 

Workman said the balance of payments data held no obvious implications for tomorrow's GDP data and were in line with expectations. 

He expects the annual current account deficit will widen to 4 percent of GDP by the end of 2021, as waning domestic demand and a weaker kiwi dollar stifles demand for imports. At the same time, the weaker currency will support services exports and a protracted period of low interest rates will contain the income deficit. 

New Zealand's net international investment position was a deficit of $165.88 billion, or 55.3 percent. 

Workman said the increased asset values held by locals was one of the big improvements in the international position over the past decade, when it was almost 85 percent of GDP. 

Sovereign funds, such as the New Zealand Superannuation Fund and Accident Compensation Corp's investment portfolio, and the rapid KiwiSaver uptake over that time have contributed to that gain, as ultra-low interest rates spurred on gains in equity markets. 

Today's data show New Zealand-owned portfolio investment in equities and funds was $109.29 billion as at June 30, up from $104.37 billion three months earlier.

The Super Fund yesterday pre-empted the tabling of its annual report in Parliament, saying the fund has now grown to $43.1 billion and has delivered a 10.2 percent annual return since it was set up in 2003, and 14 percent since the global financial crisis a decade ago. 

Chief executive Matt Whineray said the fund had scaled back the level of risk it was taking on in the short-term as the current economic environment meant there were fewer attractive investment opportunities. 

On the flipside, low interest rates have also made it cheap for the government to borrow overseas, and while Finance Minister Grant Robertson is dialling back net debt, the Crown's gross debt was $84.71 billion. 

The New Zealand Debt Management Office will today sell up to $2 billion of notes in a 2031 bond paying annual interest of 1.5 percent. 

(BusinessDesk)

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