Current-account deficit widens to record

Thursday 26th March 2009

New Zealand's current-account deficit widened to a record in 2008, as net foreign liabilities tipped the scales at 94.5% of gross domestic product, underlining the nation's vulnerability to disruptions in global capital flows.

The deficit expanded to $16.07 billion in the 12 months ended December 31, from a revised $15.53 billion in the year to Sept. 30, according to Statistics New Zealand. The gap equates to 8.9% of GDP. The figures broadly matched economists' expectations.

The yawning deficit spurred Standard & Poor's in January to lower the nation's AA+ credit rating outlook to 'negative' and warned it may cut the rating "if external imbalances begin to pressure the country's investment, growth, and fiscal performance." Still, the deficit may now be at its worst level as a weakening economy reduces imports and outflows of profits from local companies.

"The fact that the overseas merchandise trade trends are still heading in the right direction provides some basis for suggesting that the current account position may have peaked," said Robin Clements, chief economists at UBS New Zealand.

At the same time, weakening corporate profits "will work to the benefit of the investment income deficit, while lower global interest rates will reduce debt servicing costs," Clements said.

New Zealand's dollar edged higher after the figures were released and traded recently at 56.89 U.S. cents from 56.56 cents immediately before the release. The kiwi dollar has climbed 12% in the past month, mainly reflecting a weaker greenback as the U.S. moves toward printing money to revive its economy.

The current account is the broadest measure of trade and investment flows across a nation's borders.

The deficit narrowed to $4.03 billion in the three months ended December 31 from $6 billion in the third quarter, today's figures showed.

In the full year, the services deficit increased to $1.01 billion from $496 million in the 12 months through September. The deficit on goods and services widened to $2.36 billion from $2.26 billion while the deficit on investment income, which makes up about 85% of the current-account gap, shrank to $13.58 billion from $13.67 billion.

Financing of the deficit was "discouraging," according to Shamubeel Eaqub, economist at Goldman Sachs JBWere. "Only 20% of the past year's $16 billion deficit was financed by equity, while the remainder was debt and other flows."

The nation's net liabilities increased to $167.7 billion, or 94.5% of GDP as at December 31, from $165.23 billion three months earlier.

Eaqub said a sustainable level "would be closer to 60%."

"Unless foreign capital continues to be allocated to offset domestic dis-saving, the next decade is likely to be characterised by rising savings and reduced investments," he said.

By Jonathan Underhill

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