NZ current account gap not a threat to economic stability, Treasury's Mahklouf says

Wednesday 12th June 2013

New Zealand's deteriorating balance of payments won't threaten the country's economic stability and isn't unsustainable, according to Treasury secretary Gabriel Makhlouf.

The Treasury expects the country's current account deficit will rise to $16.6 billion, or 6.5 percent of gross domestic product, by 2017 from $9.1 billion, or 4.4 percent of GDP, in 2012 and is being exaggerated by insurance flows stemming from the Canterbury rebuild, and isn't ringing alarm bells, Makhlouf told Parliament's finance and expenditure committee. The balance of payments measures total goods and services which cross the nation's borders, showing how reliant the country is on foreign funding.

"The underlying current account deficit is tracking at similar levels relative to GDP to that of the recent past," Mahklouf said. "We do not believe that the size of the current account deficit represents a threat to New Zealand's economic stability or that the economy is on an unsustainable economic trajectory."

Government figures in March showed the annual deficit at $10.5 billion for the 2012 calendar year, or 5 percent of GDP.

Mahklouf said the current environment, where heating property prices threaten to stoke household confidence to take on debt and ramp up consumption, differs from the last housing bubble in the mid-2000s, as national savings have improved, and people have greater knowledge of the situation.

"What we're forecasting over the next four years does not mean that the longer term path is unsustainable," he said.

Mahklouf appeared at the last of three select committee hearings to touch on the balance of payments, which Green Party co-leader Russel Norman has jumped on in recent months, claiming it shows the government's plan to rebalance the economy has failed.

Finance Minister Bill English told the finance and expenditure committee he was optimistic the current account deficit will improve in the next five to seven years, as exporters who have weathered a strong currency show better profitability as they become more competitive.

He said he accepted warnings by rating agencies that current account was a vulnerability, but said the market was more upbeat about New Zealand's prospects.

Rating agencies "keep arguing about the vulnerability, but the market keeps pushing up our exchange rate and dropping our government stock rate, which doesn't tell me the market thinks it's a high risk," English said. "We know it's some risk."

Economic Development Minister Steven Joyce told the committee a current account deficit isn't a bad thing if foreign investment creates local jobs and growth.

"The challenge is actually to build investment in this country," Joyce said. "For $100 million invested in an industry or company in New Zealand that's what I would argue is a good thing from the current account perspective, $100 million for consumer activity is probably not as sustainable."

Joyce said the economic rebalancing has been obscured by the global financial crisis and Canterbury earthquakes, and that improvements will likely show up in the medium term.

BusinessDesk.co.nz

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