Deutsche Bank: NZ Current Account - Sept Q
Data Flash (New Zealand)
NZ Current Account - September Quarter 1999
The current account deficit for the year to September 1999 increased to $6.6bn (estimated at 6.5% of GDP), from the revised deficit of $6.2bn in the June 1999 quarter (6.2% of GDP).
This compared with average market expectations for an annual deficit of $6.8bn - with the forecast error due to a better-than-expected September quarter. There were only minor revisions to historical data.
On an annual basis, the deterioration in the deficit largely reflected:
a sharp decline in the trade surplus, with a strong increase in the imports more than offsetting a comparatively modest improvement in the export performance;
a worsening in the international investment position, primarily due to a rise in debits from increased earnings from NZ-located enterprises that are foreign owned;
Partially offsetting these negatives, the services balance improved reflecting an increase in overseas visitor numbers and a modest rise in transfers on the back of a rise in non-resident withholding tax received from overseas.
Market Reaction: The NZD strengthened immediately following the release to around 0.5100.
Current Account (year ended)
:::::::::::::::::::::::::::: Dec98::::Mar99:::: Jun99:::: Sep99
Trade Balance:::::::: 1,730::::1,465:::: 1,054:::: 472
Services Exports:::: 6,954::::7,437:::: 7,609:::: 7,735
Services Imports:::: 8,475::::8,657:::: 8,562:::: 8,538
Services Balance:::: -1,521::::-1,220:::: -953:::: -803
Total Investment Credits 812:::: 314:::: 29:::: 208
Total Investment Debits 6,621::::6,707:::: 6,915:::: 7,153
Investment Income Bal -5,809::::-6,393::::-6,886::::-6,945
Current Account Bal::::-4,978::::-5,696::::-6,216::::-6,610
% of nominal GDP:::: -5.0:::: -5.8:::: -6.2:::: -6.5
Source: DB Global Markets Research, Statistics NZ
With the annual deficit and its components broadly in line with expectations, there was little new information in today's release. However, the somewhat smaller-than-expected deficit provides a marginally better starting position for the deterioration that is forecast over coming quarters. Due to the combination of a continued strength in domestic demand, high oil prices, the importation of aircraft and a naval frigate, as well as a relatively slow export recovery, we expect the current account deficit to rise above 7.5% in the December quarter. Thereafter, the balance of payments is expected to show only a gradual improvement, with the deficit projected to remain above the 6% level over the next two years.
While we expect the trade balance to improve on the back of a stronger export performance and more favourable terms of trade, a deterioration in the investment income balance is expected to provide a partial offset. The investment debits will rise faster than nominal GDP, due to rising world interest rates and a recovery in the profitability of foreign-owned corporates in New Zealand.
The stubbornly high deficit outlook is expected to lead to a S&P rating downgrade in early 2000 (most likely following the release of the February Budget Policy Statement) and continued pressure on the medium-term performance of the NZD.
The markets' attention is now focused on the release of September quarter GDP data (Thursday, 23 December). While our central forecast is for an increase of +2.3% qoq, we attach a significant probability to an upward revision of the June quarter GDP figure and a correspondingly lower September quarter rise - with the exact quarterly pattern irrelevant for the level of the output gap at the end of the period. An overall June/September increase of 2.0% is consistent with our estimate of the underlying performance of the economy over that period.
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