NZ's current account deficit widens to 8.9% of GDP (Update 2)

New Zealand's current account deficit widened to 8.9% of GDP in the December quarter from 8.6% in the September quarter and 8.2% in December 2007, figures released by Statistics New Zealand (Stats NZ) show. The annual current account balance was a deficit of NZ$16.1 billion. (Update 2 to include further Stats NZ comment and chart.) The figure was in line with market expectations of a 9% deficit and comments earlier this week by Finance Minister Bill English. English foreshadowed this and tomorrow's GDP release, saying official data would show New Zealand's economy shrank by about 2% in 2008. A current account deficit around 9% or higher would make Standard and Poor's even more nervous about letting New Zealand keep its AA plus credit rating, given both the public and private sectors are borrowing heavily. Foreign investor nerves about the twin deficits and the credit rating mean Reserve Bank Governor Alan Bollard has less flexibility to cut the Official Cash Rate very deeply.

Bollard said earlier this month he couldn't cut the OCR much below 2.5% or it would damage New Zealand's ability to keep the confidence of foreign lenders. "The main reasons for the increase in the deficit between the year ended September 2008 and the year ended December 2008 were a rise in the value of imports of transportation services and a fall in the value of exports of travel services," Government Statistician Geoff Bascand said. "The increased imports of transportation services was mainly due to higher freight costs, while the decrease in exports of travel services was caused by fewer visitors coming to New Zealand," Bascand said. "Exports of goods increased, with higher values of dairy products behind the rise. This was offset by an increase in goods imports, which was due to an increase in the prices of imports of petroleum and petroleum products," he said. "New Zealand's current account deficit has the effect of increasing its net overseas liabilities, as external funding is required to finance the deficit. At 31 December 2008, New Zealand's overseas liabilities exceeded its overseas assets by NZ$167.7 billion (92.9% of GDP). This compares with net overseas liabilities of NZ$152.6 billion (87.1% of GDP) at 31 December 2007."