Current account deficit better than expected at 3.1% of GDP, helped by Canty quake reinsurance, Stats NZ says

By Alex Tarrant

New Zealand’s current account deficit in the year to September was smaller than expected at NZ$5.93 billion, or 3.1% of GDP, Statistics New Zealand said today.

This was aided by an inward flow of an estimated NZ$1.7 billion in reinsurance claims from the Canterbury earthquakes in the September quarter. Excluding the reinsurance claims and income tax settlements for the banking sector in the June to December 2009 quarters, the current account deficit for the year ended September would have been 3.8% of GDP, Stats NZ said.

The annual deficit of 3.1% of GDP was slightly wider than a deficit of 3% of GDP in the year to June and the highest since the year to September 2009 (3.2% of GDP). The current account deficit had narrowed to as low as 2.4% of GDP in the year to March 2010.

Market expectations had been for an annual deficit of 3.4% of GDP for the year to September. The Reserve Bank of New Zealand had been expecting an annual deficit of 3% of GDP.

Economists from ASB, ANZ and JP Morgan said the deficit remained a concern for ratings agencies and the pressure was on the government and the economy to increase savings or have such savings forced on us by international markets. BNZ and Westpac economists were more sanguine. See more detailed reaction below.

"We need to sort out our saving and investment imbalances, lest an adjustment is forced upon us. Improved household saving is a step in the right direction. The intent by the government to move fiscal settings to more sustainable levels will also help," said ANZ's economists.

"With rating agencies now punishing countries that are not showing commitment to getting their houses in order, a concerted effort at rebuilding our national savings performance cannot come soon enough," they said.

September quarter

There was a seasonally adjusted current account surplus of NZ$35 million in the September quarter, from a deficit of NZ$1.92 billion in the June quarter, Stats NZ said.

The quarterly movement from a deficit to surplus was driven by an estimated NZ$1.7 billion of reinsurance claims arising from the Canterbury earthquakes Stats NZ said.

The NZ$1.7 billion figure was an early estimate of the amount New Zealand insurers expected to claim from their overseas reinsurers and was likely to be revised significantly upwards.

“Without the NZ$1.7 billion reinsurance claims, the current account balance would have been a deficit of NZ$1.665 billion,” Stats NZ said.

“Excluding the reinsurance claims, the main driver of the current account balance this quarter was a NZ$581 million smaller investment income deficit. Profits earned by foreign-owned New Zealand companies fell NZ$551 million, while profits earned by New Zealand-owned subsidiaries abroad increased NZ$48 million,” Stats NZ said.

Net debt

At September 30, New Zealand’s net international liabilities were NZ$162.5 billion, or 85.2% of GDP, down from NZ$163.1 billion, or 86.3% of GDP at June 30, Stats NZ said.

Economist reaction

Here is JP Morgan economist Helen Kevans' take on the figures:

The deterioration of New Zealand’s current account position over the course of the year has been of little surprise. The CA balance has worsened from the rare surplus recorded in 1Q to today’s third quarter result. The March quarter surplus, one of only four surpluses (all very small) recorded since 2000, owed largely to a number of one-off company tax transactions, which have since been absent. We suspect that the CAD will deteriorate further from here and, while we are not forecasting the deficit to return to the 8%-9% of GDP-levels recorded in recent years, New Zealand clearly needs to cut its high debt and bolster savings to turn around the imbalances in the economy.

Boosting savings and reducing the nation’s reliance on foreign debt probably will be key objectives of the government when it delivers its next Budget in May. Indeed, New Zealand remains significantly in debt to foreigners, with the country running a net funding deficit of 85.2% of GDP, owing mainly to private sector debt stemming from households’ perennially low levels of saving. New Zealanders have recently become more cautious, however, and are currently paying down debt and saving, rather than spending as much as they have done in the past. Such deleveraging is dragging significantly on growth, given consumption accounts for about two-thirds of the economy, but is an important step toward the much-needed rebalancing of the economy.

The unadjusted trade balance turned around from a surplus of NZ$2.4 billion in 2Q to a deficit of NZ$324 million in 3Q, thanks to a slump in exports. Export prices were flat, while volumes were down 2.9%q/q, thanks mainly to a decline in exports of meat products, which fell to their lowest level in eight years. Import volumes increased over the quarter, while prices fell thanks to stronger NZD, up 6% against the US dollar in 3Q. The balance on services remained in deficit.

The income deficit at NZ$2.3 billion was NZ$591 million lower over the quarter. The decline owed mainly to a drop of NZ$581 million in the investment income deficit; this was thanks to a drop in foreign investors’ earnings on their investments in New Zealand. Investment income earned from investment abroad rose for the third straight quarter.

Here is ASB economist Jane Turner:

The current account was slightly narrower than expected by the market, and StatsNZ signalled that potential revisions relating to the earthquake reinsurance activity are likely to narrow the Q3 deficit further.

The current account is likely to get added focus over the next few years, particularly by rating agencies.  The current account is expected to widen over the next few years, particularly as much of the narrowing through 2009 and early 2010 was largely due to cyclical factors.  

 As the economy recovers, profitability improves and import demand lifts the current account will widen further. The concern for the rating agencies will be on the size of the current account deficit that is sustainable, given New Zealand’s high level debt international (currently at 85.2%).

We currently expect the current account deficit to reach 5.2% by 2012, which will result in NZ’s net international investment position returning to around 86% of GDP.

Here is ANZ economists Mark Smith and Steve Edwards' reaction

A decline in net international equity liabilities contributed to a small decline in our net overseas external debt. However, at $162.5b (85.2 percent of GDP), it remains very high. We need to sort out our saving and investment imbalances, lest an adjustment is forced upon us. Improved household saving is a step in the right direction. The intent by the government to move fiscal settings to more sustainable levels will also help.

With rating agencies now punishing countries that are not showing commitment to getting their houses in order, a concerted effort at rebuilding our national savings performance cannot come soon enough.

We expect the current account deficit to move higher from here, but one-offs and low domestic profitability will cap this deterioration in the near-term. Moreover, we do not expect a return to large current account deficits over the next few years. In the present environment that would be a recipe for a credit rating downgrade. Instead, we see New Zealand’s current account deficit remaining in a 2 to 4 percent of GDP range over the next couple of years.

Here is BNZ's economic view of the deficit.

Once the noise comes out of the accounts, we anticipate that the balance will again deteriorate and forecast it heading for around 5.0% of GDP by end 2013. While unwelcome, this level of deficit will not be so great as to push the country’s net international investment shortfall any higher as a percent of GDP. This encourages us to have some faith that the recent improvement in the international investment position can be built upon.

As things stand, this shortfall has already reduced to 85.2% of GDP from a peak of 90.7% in March 2009. This all helps convince international investors that New Zealand’s economic stability is not at threat. Indeed they seem to be taking this to heart with offshore buyers purchasing $3.1 billion of New Zealand bonds in the quarter. With respect to the debt of the economy it was also pleasing to see that short term debt now represents just 38% of total, well down from its peak of 55.0% in March 2008 – again reducing the nation’s vulnerability to shocks.

To complete the positive news on the debt front, debt servicing costs as a percentage of exports remained at just 11.8%, the lowest since September 2004 and well down from the 20.5% peak of December 2007. Much of this is simply a function of the low interest rate environment we are currently in but it all helps.

Here is Westpac's view of the deficit

It's well recognised that the deficit is near a cyclical low point after the relatively deep economic downturn in 2008-09. The real point of interest is how far the deficit will widen again in the next few years, as the economy returns to its potential. Interestingly, there are two clear camps emerging. On one hand, the Treasury and some credit rating agencies are projecting the deficit to head towards 7% of GDP, similar to the unsustainably large deficits of the previous decade.

On the other hand, the RBNZ and many private sector forecasters (including us) suggest that the deficit will settle around more sustainable levels of 4-5% of GDP. What's more, the point of disagreement seems to be not the trade balance, but investment income - that is, how much the cost of New Zealand's external funding will rise from today's relatively low starting point.

To the extent that today's release provides any insight, it slightly favours the 'sustainable deficits' camp. To us, the risk was for a continuation of the rapid rise in the investment income deficit over the previous year; instead, the upward trend seems to be slowing (though admittedly the data is very choppy).

(Update adds JP Morgan, ANZ, ASB, BNZ, Westpac comments)