First Current Account Surplus Since 1988

First Current Account Surplus Since 1988, But Banks Still Behaving Badly

The first current account surplus in any three month period since December 1988 would be a notable turning point if it were not for its causes, which include a trade surplus resulting from much reduced economic activity, lowered corporate profits and the enforced payment by banks of tax which they have been avoiding for years.

“The difference between what New Zealand earns and spends abroad was positive in the September 2009 quarter by $340 million (seasonally adjusted), compared to a deficit of $406 million in the three months to June. However the surplus was caused by factors that we hope will not be repeated,” said CTU Economist and Policy Director Bill Rosenberg.

“Firstly, imports are down due to the recession and falling prices. Exports are down too, with dairy volumes increasing but unable to fight off falling export prices during the quarter. The net result was a surplus on our goods trade – but due to the hard economic times rather than success in exporting or replacing imports with locally produced goods.

“Secondly, the deficit on income paid to investors was down to $574 million for the three months to September. That was in large part due to further payments of tax by banks found by the Courts to have been involved in massive tax avoidance: $1,366 million in the period. But it was also helped by lower interest rates, lowered corporate profits, and increased income from overseas subsidiaries of New Zealand companies.

“For the year, the current account deficit was $5.7 billion – only 3.1 percent of GDP, compared to proportions of up to 9.0 percent in recent years – but still a reminder of New Zealand’s chronic international liability problem. Again it has been improved by the banks’ tax payments, with $661 million in the June quarter adding to the $1,366 million in the latest quarter, and helped by the recession-driven low levels of imports.

“The surplus on goods for the year was swamped by the income paid to overseas investors, despite the banks’ tax payments. The deficit on investment income was $8.0 billion for the year – considerably greater than the whole $5.7 billion current account deficit.

“The deficits are funded by international borrowing or foreign ownership of New Zealand assets. It is well to remind ourselves that banks are still responsible for 71.5 percent of New Zealand’s net international borrowing – a proportion which is only reducing slowly (it was 72.6 percent a year ago).

“Short term borrowing was a huge vulnerability at the height of the financial crisis, leading to the Reserve Bank stepping in to protect the banking system. While the proportion of short term borrowing is now easing due in part to Reserve Bank actions (at September, 42.0 percent of financial liabilities were due to be repaid within a year compared to 51.5 percent at September 2008), banks are still incurring large overseas short term liabilities. Statistics New Zealand notes that the high level of $5.1 billion in portfolio investment into New Zealand during the quarter “was mainly driven by the banking sector issuing short term debt securities that were purchased by overseas investors”.

“While the government is borrowing to cover its stimulus spending, government debt is still a very small part of the international liability problem. Only 7.2 percent of net international borrowing was by government other than the Reserve Bank at September. If the Reserve Bank’s net position is added, the New Zealand government is in credit internationally to the tune of $3.4 billion. The problem remains one of private debt. New Zealand’s net international liabilities stand at 93.7 percent of GDP compared to 88.3 percent at September 2008.”

ENDS

© Scoop Media