BOP and International Investment Position - Q2

Data Flash (New Zealand)
NZ: Balance of Payments and International Investment Position - Q2 2001

Key Points

A current account deficit of $297m was recorded in Q2 2001. This result compared favourably with market expectations of a deficit of $690m and our own forecast of a deficit of $566m.

The trade balance recorded a surplus of $1,792m and the services balance recorded a deficit of $406m. Strong net tourism flows have reduced the annual services deficit to the lowest level since 1996. Notwithstanding the likely negative impact of recent events on the tourism industry, the services balance may move into surplus later this year for the first time in recorded history. The balance on investment income recorded a deficit of $1,802m - a much better result than expected by the market. The key factor explaining this result was higher earnings from New Zealand residents' direct and portfolio investments in foreign enterprises. Investment debits, reflected the earnings of foreign companies operating in New Zealand, were also a little lower than expected. The balance on current transfers recorded a surplus of $119m - broadly in line with expectations.

In seasonally adjusted terms, the overall current account deficit was just $526m in Q2 - less than 2% of GDP. The surplus on the combined goods and services balance improved from $911m in Q1 to $1,159m in Q2. The deficit on the combined investment income and transfers balance improved from $2,011m in Q1 to $1,684m in Q2.

On an annual basis, the current account deficit was $4.5bn - around 4.0% of GDP. This compares to a deficit of $7.4bn a year earlier. The $2.9bn annual improvement reflects a $3.4bn improvement in the trade surplus (partly explained by import of a $0.6bn naval frigate during the previous year) and a $0.1bn improvement in the services balance, offset to some extent by a $0.7bn worsening in the investment income balance (largely reflecting the increasing costs of funding ongoing current account deficits).

New Zealand's net international liabilities rose to $87.6bn (73.6% of GDP) from $84.3bn in Q1 2001 (72.0% of GDP), largely reflecting a rise in net international debt (in turn, due to lower financial derivative assets).

Market Reaction: Although the outcome was much better than expected, the NZD displayed little reaction to the data.

Comment

Today's result reaffirms the trend improvement in New Zealand's current account deficit that we have been forecasting for some time. In seasonally adjusted terms, the latest quarter's result equates to annualised deficit of less than 2% of GDP. We think this quarter will prove to have been `as good as it gets' - at least until global demand conditions recover.

We expect the annual deficit to head lower over the remainder of 2001 - to around 3.3% of GDP - before moving modestly higher over 2002 (reflecting a weakening profile for exports of both goods and services and a deterioration in the terms of trade).

Revaluation adjustments aside, such a deficit would, nonetheless, be low enough to broadly stabilise New Zealand's net internal liabilities as a proportion of GDP.

While the NZD showed little immediate response to the data, the favourable outturn reinforces our view that the medium-term fundamentals remain positive for the NZD. While risk aversion in the wake of the events of 11 September is expected to weigh on the NZD in the near-term, a significant appreciation from current levels appears likely as fundamentals reassert themselves. Indeed, if this does not occur, and the global economy recovers strongly, a further improvement in the current account deficit towards balance is plausible over coming years (New Zealand last achieved a surplus in 1973).

Darren Gibbs, Senior Economist, New Zealand,

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