By Tracy Withers
Sept. 19 (Bloomberg) -- New Zealand's annual current account deficit widened to a record in the year ended June as a drought led to a slump in dairy exports and rising oil and food prices fanned imports.
The gap expanded to NZ$14.97 billion ($10.1 billion) in the 12 months ended June 30 from a revised NZ$14.21 billion in the year to March, Statistics New Zealand said in Wellington today.
A drought forced dairy farmers to reduce milk production, leading to a 17 percent slump in dairy exports in the second quarter. The current account gap, the broadest measure of trade because it includes tourism, other services and investment income, may widen further as slowing global economic growth curbs commodity prices.
``The problems are a lot more fundamental and it will take a lot to get the deficit into a safe zone,'' said Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington. ``We have this massive deficit even though the terms of trade are peaking. The way out of this will be a bumpy road.''
New Zealand's dollar bought 67.41 U.S. cents at 11:55 a.m. in Wellington from 67.48 cents immediately before the report.
The annual deficit was probably 8.3 percent of gross domestic product, according to the median estimate of five economists surveyed by Bloomberg News today after the report was released. The statistics agency will publish the official figures on Sept. 25.
The gap widened from a revised 8 percent in the year through March. By comparison, neighboring Australia's current account deficit was 6.2 percent of GDP at June 30.
Quarterly Deficit
Economists prefer to watch a rolling annual current account balance than the quarterly deficit, which can be volatile. The median estimate of 11 economists surveyed by Bloomberg was for a NZ$14.21 billion annual shortfall.
In the three months ended June 30, the current account deficit widened to NZ$3.91 billion from NZ$3.15 billion a year earlier. Economists forecast a NZ$3.42 billion quarterly gap.
A deficit represents money New Zealand has to borrow overseas to pay for the goods and services it imports, and to finance investment not covered by local savings. A wider deficit makes New Zealand more dependent on foreign funding, which could cause the nation's currency to fall.
The trade deficit widened to NZ$1.83 billion in the 12 months ended June 30 from NZ$1.75 billion in the year through March, today's report showed.
Exports fell in the second quarter led by a drop in butter, cheese and milk powder volumes, the statistics agency said.
Dry Weather
A drought that began in October extended until March. Some parts of the country received the least rain in a century in January, according to the National Climate Center.
Farmers produced less milk, prompting Fonterra Cooperative Group Ltd., the world's largest dairy exporter, to announce in February it may restrict new export orders.
Imports gained as soaring crude oil prices increased the value of fuel purchases.
The deficit on investment income, which makes up most of the current account, widened and the services balance, which includes spending by overseas visitors, was in deficit for the first time in seven years.
The deficit on investment income grew amid increased payments to foreign owners of assets such as the Tui oil field, which is 42 percent owned by Sydney-based Australian Worldwide Exploration Ltd. and 35 percent owned by Japan's Mitsui & Co.
The annual deficit on investment income widened to a record NZ$13.93 billion from NZ$13.39 billion in the year through March.
Foreign investors earned more from their local subsidiaries and their holdings of stocks and bonds, outpacing income earned by New Zealanders investing offshore.
Interest payments to overseas parent companies increased because of higher levels of borrowing, the agency said. New Zealanders earned less from their overseas subsidiaries offsetting gains by locally based fund managers, it said.
To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.
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