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Data Flash (New Zealand) Balance of Payments

Data Flash (New Zealand) Balance of Payments - Q3 2000

Key Points

* The current account deficit for Q3 2000 was $2.1bn, compared with a deficit of $2.6bn in Q3 1999. The deficit for Q2 2000 was revised down by approximately $0.2bn.
* The outcome was much better than expected by the market (our central view was at the market median, though we had highlighted that risks were skewed towards a better outcome).
* At the component level, around 80% of the better than expected outcome reflected a smaller than expected investment income deficit, reflecting lower profits by foreign owned enterprises operating in New Zealand and higher income from New Zealand investments offshore (assisted by the weak NZD). The trade balance was also marginally better than we had expected.
* The deficit for the year to Q3 2000 was $6.9bn - equivalent to around 6.5% of GDP.
* The seasonally adjusted current account deficit declined for the third consecutive quarter (both on the goods and services and investment income balances). At $1.2bn, the Q3 deficit was the lowest recorded since Q1 1999. When annualised, the latest result equates to a deficit of 4.5% of GDP, reinforcing our view that the annual deficit will improve further over coming quarters.
* On an annual basis, the current account deficit has deteriorated by around $2bn, reflecting:
* a $0.4bn decline in the trade surplus, more than accounted for by the import of a naval frigate in Q4 1999 and sharp increases in the cost of oil; and
* a $1.8bn worsening in the international investment position, reflecting both a fall in credits and a sharp rise in debits.
* Partially offsetting these negatives, the balance on services has improved by around $0.4bn over the past year reflecting strong growth in net tourist arrivals.
* Market Reaction: The NZD strengthened by around 40pts to a high of 0.4282, before drifting back slightly towards the 0.4270 region.

Comment

* Today's release confirms our view that the current account deficit is set to improve markedly over the next two years. * With the purchase of the frigate in Q4 1999 due to drop out of the annual calculation, the annual deficit is expected to decline to less than 5.5% of GDP in Q4 2000 and to around 4.5% of GDP in Q1 2001. * Our medium term forecast remains a current account deficit of 3% or below within two years. This reflects our expectation of a significant improvement in the trade balance as a result of strong growth in net export volumes (both for goods and services) and a further improvement in the terms of trade as the beneficial effects of recent oil price declines feed through to import costs. A further contraction in the investment income balance could see this forecast realised by the end of 2001. * The main risks to this outlook are a stronger than expected downturn in the world economy - our current forecasts factor in a soft-landing in the US - and too rapid an appreciation of the NZD, thus reducing the price competitiveness of New Zealand production (our current forecast is for the NZD to reach USD0.4500 within 3 months and USD0.4900 within 12 months). A recovery in world oil prices would also make our forecast more difficult to achieve.

Darren Gibbs, Senior Economist, New Zealand

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