Bank borrowing and profit repatriation driving current account deficit
After 15 months of improvements in the current account deficit, income paid to overseas investors is returning the deficit to its previous form, said Bill Rosenberg, CTU Economist and Policy Director today. The current account is the difference between what New Zealand as a nation pays and receives from abroad.
“The country appears to be leaving this recession in the same state it came in, with exports faltering, imports rising again, and banks still borrowing heavily abroad to finance mortgages and other lending. It does not bode well,” said Rosenberg.
The current account deficit for the three months ended December 2009 worsened from $1.6 billion to $3.6 billion – when adjusted for seasonal effects, the largest quarterly fall ever recorded. The fall was due mainly to a large increase in profits and interest paid to overseas investors, leading to a deficit of $3.4 billion on investment income. However in addition, in seasonally adjusted terms exports fell by $255 million while imports rose $150 million and other contributors to the overall current account deficit also worsened.
Although New Zealand’s net liabilities to the rest of the world improved during the quarter, banks are still borrowing heavily from overseas and borrowing short term. Bank debt drove a $6.5 billion flow of foreign investment into New Zealand. It was “mainly in short term money market instruments” according to Statistics New Zealand. Outward investment of $5.4 billion was itself in large part also from the banks. Liabilities due within 12 months have begun to rise again – 44 percent of financial liabilities are now due within that period, compared to 41 percent in September 2009. The banks’ short term overseas borrowing led to Reserve Bank concerns during the financial crisis.