Opinion: Why NZ's current account deficit could fall to 5.5% of GDP in 12 months

By Roger J Kerr Asia-Pacific Risk Management Limited ("APRM") recently conducted a detailed analysis as to what makes up our Current Account deficit and what are the trends of those individual component parts. Our conclusions from that analysis and forecast of how that deficit number should track over the next 12 to 24 months are markedly different to the current mainstream economic viewpoint on this important economic measure. Most economic forecasting groups predict the Current Account deficit to remain around existing wide levels. Based on strong historical correlations between the Investment Income deficit and general business profitability levels in New Zealand and international interest rates, APRM projects the Current Account deficit to reduce from the current 8.9% of GDP to near 5.5% of GDP over the next 12 months.

If this projection proves to be accurate, this should be good news for the credit rating agencies as they consider whether to downgrade New Zealand's sovereign rating due to the dual deficit problem (growing Government budget deficit alongside the large Current Account deficit). The analysis highlights a stark and structural reality that the largest and dominating contribution to the increase in the Current Account deficit over the last five years has been the increased profitability of overseas-owned companies operating in New Zealand. The profits and dividends are owed to the foreign owners (e.g. the Australian owned banks) and therefore increase the liabilities side of the external accounts. As the economic recession in New Zealand significantly reduces company profitability, those liabilities to overseas owners will also decrease. APRM projects the overall deficit to reduce from NZ$16.0 billion at 31 December 2008 to NZ$10.5 billion by the end of 2009. The Investment Income balance (comprising "direct", "portfolio" and "other") to reduce by NZ$3.0 billion over the next 12 months, from NZ$13.6 billion to NZ$10.6 billion. Concurrently, the trade (import/export) balance to improve by NZ$3.4 billion, moving from a NZ$2.4 billion deficit to a NZ$1.0 billion surplus due to weaker imports and stronger growth in exports. The services balance, incorporating mainly reduced receipts from tourists, is forecast to deteriorate from a present deficit of NZ$1 billion to NZ$1.7 billion. Substantial reductions in global interest rates over the last 12 months will reduce the interest amounts paid and owed to foreign lenders from New Zealand domiciled banks. APRM's estimation is that the interest bill paid offshore could decrease by up to NZ$1.5 billion this year. The anticipated significant changes in company profitability and global interest rates produce a forecast of a material decrease in our Current Account deficit in 2009. ____________ This was the Executive Summary of the analysis, titled "External Deficit Dissected: Victims of our own success?"  Here is the link to the full analysis. ____________ * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com