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NZ current account deficit falls to 2.4% of GDP in March quarter from 7.9% a year ago

NZ current account deficit falls to 2.4% of GDP in March quarter from 7.9% a year ago

New Zealand's current account deficit improved dramatically in the March quarter to its best level since the September quarter of 1989 because of rising export returns and as big bank tax payments reduced profits earned by foreign companies.

The current account deficit for the year to the March quarter fell to 2.4% from 7.9% a year ago. This was better than economists expectations of around 2.7%.

(Updated with comments from JP Morgan and ASB economists saying the improvement will be shortlived, RBNZ forecast of deficit back to 7% of GDP by late 2012)

 Economists, however, said the result should be taken with a grain of salt given the one-off nature of the tax payment benefit and a likely deterioration again in coming years.

"While today’s result is impressive, the improvement in the current account likely will short-lived. Excluding the large one-off tax transactions recorded during the March 2010 year, the CAD would have much worse at NZ$6.1 billion, or 3.3% of GDP," JP Morgan economist Helen Kevans said.

"Only recently did RBNZ Governor Alan Bollard warn that New Zealand needed to cut its high debt and improve the quantity and quality of its savings to turn around the imbalances in the economy," she said.

The Reserve Bank forecast in its June Monetary Policy Statement that the current account deficit would worsen back to around 7% of GDP by last 2012 as businesses invested more and New Zealand's structural imbalances have yet to be completely fixed.

ASB economist Jane Turner said the NZ current account had made a startling improvement since December 2008, largely owing to the cyclical impact of the recession.

"However, with the economic recovery now on track, it appears the underlying drivers of the current account have turned and the current account improvement could be close to petering out," Turner said.

"Although this quarter’s result was impressive, underpinned by strong export prices (particularly diary prices) and strong earnings from offshore, we do not expect it to last. Strengthening import demand will erode the trade surplus over the next year, while stronger profitability associated with a stronger economy will see the investment income deficit expand," she said.

"A positive with the release is that NZ’s net international debt position has decreased slightly, reducing NZ’s large external net liability."

At 31 March 2010, New Zealand's net international debtor position was $166.7 billion (88.9 percent of GDP), compared with $168.3 billion (90.6 percent of GDP) at 31 December 2009

Turner also made the point that the decision by banks to reduce their use of 'hot' money markets had helped the net debt position. "The net financial account inflow of $87 million in the March quarter was a result of the withdrawal of NZ investment abroad of $1217 million exceeding the withdrawal of foreign investment in NZ of $1130 million. This withdrawal of NZ investment abroad was largely driven by NZ banks reducing their overseas short-term lending and their deposits abroad."

At 31 March 2010, New Zealand's short-term overseas debt was 40.4 percent of total overseas debt, the lowest level since the series began in June 2000. This reflects banks working towards the Reserve Bank of New Zealand's revised Prudential Liquidity Policy, which requires banks to hold longer-term foreign funding.

Here is the Statistics NZ statement below and our Balance of Payments chart below.

Rising exports and a fall in the investment income deficit helped reduce New Zealand's seasonally adjusted current account balance by $1.6 billion in the March 2010 quarter, Statistics New Zealand said today. The deficit is now $1.3 billion.

The increase in exports of goods was mainly due to higher prices, especially for dairy products overseas.

"This is the first increase in goods exports for over a year," said balance of payments manager John Morris. "Dairy prices moved significantly."

Profits earned by foreign-owned New Zealand companies fell this quarter, exaggerated by a tax transaction that increased banking sector profits in the previous quarter.

Excluding this tax transaction, banks' profits remained flat this quarter. New Zealand investors also earned more from their overseas subsidiaries.

Unadjusted for seasonal effects, the current account balance shows a surplus of $0.2 billion, the first March quarter since 2003 that New Zealand has earned more from overseas than it has spent abroad.

The current account deficit for the year ended March 2010 was $4.5 billion (2.4 percent of GDP), down from $14.6 billion (7.9 percent of GDP) a year ago. Imports of goods fell $8.3 billion over this time, while income from foreign investment in New Zealand fell $5.8 billion. At 31 March 2010, New Zealand's net international debtor position was $166.7 billion (88.9 percent of GDP), compared with $168.3 billion (90.6 percent of GDP) at 31 December 2009.

A net international debtor position means that overseas investment in New Zealand is greater than New Zealand investment abroad.

The majority of New Zealand's net international debtor position is made up of debt.

At 31 March 2010, New Zealand's short-term overseas debt was 40.4 percent of total overseas debt, the lowest level since the series began in June 2000. This reflects banks working towards the Reserve Bank of New Zealand's revised Prudential Liquidity Policy, which requires banks to hold longer-term foreign funding.

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