New Zealand Current Account Deficit Widens to Record

By Tracy Withers

March 26 (Bloomberg) -- New Zealand’s current account deficit widened to a record in the year through December as the global recession reduced tourism and as costs for shipping goods overseas increased.

The shortfall expanded to NZ$16.07 billion ($9 billion) in the 12 months ended Dec. 31 from a revised NZ$15.53 billion in the year through September, Statistics New Zealand said in Wellington today.

Finance Minister Bill English said this week the deficit is “uncomfortably large” and makes New Zealand vulnerable to international market turmoil amid its dependence on foreign funding. Standard & Poor’s said on Jan. 13 that it may cut the nation’s AA+ foreign-currency credit rating if the current account gap and rising overseas debt begin to curtail economic growth and investment.

“We expect the deficit to keep international investors and rating agencies nervous,” Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington, said before the report was released.

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. Any drop in foreign funding would threaten the value of the local dollar and bonds.

New Zealand’s dollar bought 56.60 U.S. cents at 10:52 a.m. in Wellington from 56.58 cents before the report was released. The local currency has fallen more than 30 percent against the U.S. dollar in the past year, the worst performer of 16 most- traded currencies tracked by Bloomberg.

Global Comparisons

The annual current account deficit widened to 8.9 percent of gross domestic product from 8.6 percent in the year ended Sept. 30. That compares with the median estimate of a 9 percent gap in a Bloomberg News survey of seven economists. The deficit reached 9.3 percent of GDP in early 2006

By comparison, Australia’s current account gap was 4.3 percent of GDP at Dec. 31. The U.S. posted a fourth-quarter shortfall of 4.7 percent of GDP.

New Zealand’s current-account deficit, the broadest measure of trade because it includes tourism and investment income, may narrow this year as the domestic recession reduces imports of consumer goods and business equipment, said Ebert.

“Moderation is likely to be the trend this year and next, albeit to less discomforting proportions rather than anything to feel particularly comfortable about,” Ebert said. The gap may be NZ$14 billion by December 2009, he added.

New Zealand Recession

The nation’s economy probably shrank 1.1 percent in the three months ended Dec. 31 from the previous quarter, the biggest contraction in almost 18 years, according to a Bloomberg News survey of nine economists. The GDP report is due for release at 10:45 a.m. in Wellington tomorrow.

Economists prefer to watch a rolling annual current-account balance for New Zealand because of volatility in the quarterly readings.

In the three months ended Dec. 31, the current account deficit narrowed to NZ$4.03 billion from NZ$6.01 billion in the third quarter. It widened from NZ$3.48 billion in the same period a year earlier. Economists forecast a NZ$4 billion quarterly gap.

The nation’s services deficit more than doubled, making the largest contribution to the wider annual current account gap, today’s report showed. The trade deficit also increased while the investment income shortfall narrowed.

The services deficit widened to NZ$1.01 billion from NZ$496 million in the 12 months ended September. Higher sea freight charges made the biggest contribution and tourist arrivals declined.

Trade Deficit

The goods and services trade deficit widened to NZ$2.36 billion in the 12 months to December from NZ$2.26 billion in the year through September. Fourth-quarter imports rose 11 percent from a year earlier, led by the increased cost of crude oil. Exports increased 10 percent.

The annual deficit on investment income, which makes up most of the current account, narrowed to NZ$13.58 billion from NZ$13.67 billion in the year ended Sept. 30.

Foreign investors earned less from their local subsidiaries and their holdings of stocks and bonds. Income earned by New Zealanders investing offshore also declined.

New Zealand’s net liabilities increased to NZ$167.7 billion, or 92.9 percent of GDP at Dec. 31, from NZ$165.23 billion, or 92 percent at Sept. 30, today’s report showed.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.