Deficit and international debt down, but for the right reasons?

Monday May 14, 2012

The “good” news is that the current account deficit is down sharply, and that our net international debtor position is slightly less cringe-worthy than in March. But the main reasons for this are the stronger exchange rate, poor demand for imported intermediate goods, and an Aussie bank having to pay its taxes.



The current account deficit narrowed drastically in the June 2009 quarter. At $612 million for the three months, seasonally-adjusted, it was 70 percent lower than the quarter before. On a longer-term scale, the annual deficit has fallen from $15.9 billion in the December year, to $10.4 billion just six months later, a fall of 35 percent. As one commentator said, however, if the deficit did not fall even in times of recession, we really would need to be worried (even more than we are now, with our net international investment position at -$172 billion).


While imports fell, exports fell by a similar figure. So where, then, has the decline in the current account deficit come from? It turns out that investment income owned by foreign residents in New Zealand fell by $1.18 billion. Is this a good thing?


Around half this decline in investment income was the result of a major bank losing its argument with the IRD, resulting in a large inflow of money that had previously flowed out to its parent in Australia. At the same time, interest paid to foreign investors on debt fell by more than $200 million. This is likely to have been the result of lower interest rates, and lower levels of international financial liabilities (down 4.7 percent compared with the March quarter). On the positive side, dividends to non-resident portfolio investors rose, suggesting some companies in New Zealand are beginning to turn the corner, and can afford to pay more in dividends.


The goods surplus was over $800 million in the June quarter, the second surplus in a row. While total export values were up, this hid the major story of increased volumes and sharply lower prices (-12 percent). Leading this charge was a 24 percent fall in dairy product prices.


Lower imports were the result of falls in prices and volumes. The fall in price is likely the result of lower world prices (New Zealand is too small a player to affect prices to any large degree), while lower volumes will be the result of the slowdown here referred to by the commentator quoted earlier. Unfortunately much of the drop in import volumes was in intermediate goods, which are goods used in the production of final, or consumption, goods. This means businesses in New Zealand have been buying fewer machines, parts and ingredients for making products consumed domestically or by our export markets. That is not a good thing.


On the services side, the deficit fell to $78 million from $240 million last quarter. Much of the change was in lower transport costs of goods to New Zealand, and fewer New Zealanders travelling overseas. Over the same time, the number of overseas residents visiting New Zealand rose, but a shift toward more visitors from Australia meant lower spend per person. This may be because many visitors from Australia are those with friends or family in New Zealand, taking advantage of lower fares as airlines seek to fill seats, and jet fuel prices sit lower.

Net capital inflows into New Zealand were positive again, at $577 million, but down on the $2.75 billion recorded in the March quarter.

The net international debtor position fell by around $1.9 billion, but this was mostly the result of revaluations of New Zealand’s assets and liabilities, thanks to the surging NZ$.