Annual Current Account Deficit Widens Further

Balance of Payments and International Investment Position: December 2005 quarter — 23 March 2006

Annual Current Account Deficit Widens Further

The year-ended December 2005 current account deficit was $13.7 billion (8.9 percent of GDP), Statistics New Zealand said today. This compares with a deficit of $9.8 billion for the December 2004 year (6.7 percent of GDP). The $3.9 billion widening of the year-ended deficit was due mainly to a $2.1 billion increase in the value of goods imported over the period, combined with a $1.4 billion increase in the income earned from foreign investment in New Zealand.

The current account measures the value of New Zealand's international transactions in goods, services, investment income and transfers. The year-ended current account deficit has widened for the last 11 quarters, and is now $9.0 billion larger than the $4.7 billion deficit recorded in the March 2003 year.

The two key features of the widening of the annual current account deficit are the goods balance and the investment income balance. The year-ended goods balance has gone from being a surplus of $3.6 billion in the September 2001 year to a deficit of $3.9 billion in the December 2005 year driven by rising imports, a turnaround of $7.5 billion. In addition, the investment income deficit, which was relatively stable at around $7.0 billion in the years ended

March 2002 to December 2003, is now contributing to the widening of the annual current account deficit. The investment income deficit has increased from $7.4 billion in the March 2004 year to $10.8 billion in the December 2005 year, primarily due to increasing income earned by foreign investors from their New Zealand investments.

The seasonally adjusted current account deficit was $3,377 million in the December 2005 quarter, $466 lower than the September 2005 quarter deficit.

An increase in the value of goods exported, combined with a decrease in the value of goods imported, contributed to the narrowing of the current account deficit this quarter. At this point, this slight improvement in the quarterly current account deficit should be treated with caution, as it is too early to conclude that the deficit will continue to narrow.

The value of exports of goods rose $386 million this quarter, with an increase in export volumes only partly offset by lower export prices. The major export commodities contributing to the rise in export volumes were dairy products, meat, and food and beverages. The value of imports of goods fell this quarter, after allowing for Balance of Payments conceptual adjustments to merchandise trade data. These adjustments take into account timing differences and ownership changes.

The current account deficit represents the economy's demand for resources exceeding its domestic supply. Over the year to December 2005, New Zealand has funded its current account deficit by a mix of reducing overseas assets, and increasing its liabilities to overseas investors.

These transactions resulted in a net $12.2 billion inflow of investment capital to New Zealand over the year. This inflow comprised a $4.3 billion withdrawal of New Zealand investment from abroad (disinvestment), and a net flow of foreign investment into New Zealand of $8.0 billion.

These divesting and investing activities over the year have increased the level of New Zealand's net overseas liabilities (overseas liabilities exceeding overseas assets). At $136.5 billion at 31 December 2005, these net liabilities were $10.5 billion larger than one year ago, at 31 December 2004. The main feature of the increase in net overseas liabilities over the last year has been a rise in New Zealand's net overseas debt, channelled primarily through an $11.1 billion increase in the net overseas debt of the New Zealand banking sector.

Brian Pink

Government Statistician

ENDS