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Current account gap shrinks to 21-year low

Wednesday 23rd June 2010

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New Zealand’s annual current account deficit shrank to 2.4% of gross domestic product, a 21-year low, as foreigners earned less from their investments and imports weakened.

The current account gap was $4.5 billion in the year ended March 31, down from a deficit of $5.3 billion, or 2.9% of GDP in the year ended Dec. 31, according to Statistics New Zealand. A deficit of $5.07 billion, or 2.7% of GDP was expected, according to a Reuters survey.

The balance of payments is in something of a sweet spot. Demand for the nation’s primary sector commodities has stoked export receipts, while weak corporate investment and deleveraging households have sapped demand for imports. At the same time, the fragile economic recovery means foreign investors earned less income from the New Zealand investments. Those forces will probably abate as the economy picks up pace again.

“We’ve seen an incredible improvement in the deficit” which highlights the “encouraging” rebalancing of the economy, said Philip Borkin, economist at Goldman Sachs JBWere. The deficit is set to widen again as foreign firms, such as the banks, increase their profits again, though “the key is it will not widen anywhere near where we’ve come from.”

The kiwi dollar traded at 70.58 U.S. cents after the figures, from 70.51 cents immediately before the report was released.

In the three months ended March 31, the unadjusted current account balance was a surplus of $176 million, compared to a Reuters forecast deficit of $270 million. That’s the first such surplus since 2003 though it partly reflects a large tax transaction.

The investment income deficit tumbled by $5.4 billion to $7.6 billion, which partly reflected tax transactions totaling $1.6 billion. The investment deficit has receded from its June 2008 peak of $13.7 billion, reflecting lower earnings from foreigners in New Zealand and better returns from New Zealand investments offshore.

The goods balance was a surplus of $2.8 billion in the latest year, from a deficit of $4.1 billion in the 12 months through March 2009. That reflected a $8.3 billion slump in imports, almost twice the decline in exports at $4.2 billion.

The annual balance on services was a deficit of $200 million, down from a gap of $1.1 billion a year earlier, mainly reflecting a decline in imports of transport services, as freight prices fell and import volumes tumbled 18.2%.

New Zealand’s net international liabilities were $166.7 billion, or 88.9% of GDP at March 31, down $1.6 billion from December 31.

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