CTU MEDIA RELEASE
22 September 2009

Balance of Payments: improvements good; reasons bad

The improvement in the Balance of Payments to June 2009 is rare and to be welcomed. “It is most regrettable though that the improvement is almost all due to the difficulties that New Zealand faces in the current recession, and the level of international private indebtedness,” says Bill Rosenberg, CTU policy Director and Economist.

The current account deficit fell $1,508 million from the March 2009 quarter when adjusted for seasonal patterns. This was due to a fall in income on foreign investment in New Zealand – largely a result of falling company profits due to the recession. For the year to June 2009 there was a welcome fall in the deficit from 8.1 percent of GDP to 5.9 percent, the lowest since September 2004.

Rosenberg noted that “as usual, the banking sector has been a big influence on the situation”. In unadjusted values there was a surplus on the current account of $124 million in the June 2009 quarter: the first actual quarterly dollar surplus since the March 2003 quarter. But this was only because the BNZ booked a company tax provision of $661 million during the quarter – presumably due to the court finding against it for previous years’ tax avoidance. Without that, there would have been a deficit of $537 million. The tax provision was paid out of the bank’s retained earnings, and so shows up as a withdrawal of investment from New Zealand.

Banks were responsible for a rise in New Zealand’s net overseas debt, increasing their indebtedness by $8.2 billion. They are responsible for 77.0 percent of the net international debt. However there is a welcome reduction in the short term exposure New Zealand has to international debt markets. Of the total overseas debt, that with a time to maturity of one year or less was 44.2 percent at June 2009, compared with 51.4 percent at June 2008. It is likely that this is in part due to Reserve Bank prudential rules requiring banks to reduce their use of short term funding.

The net international liabilities position improved from $173 billion or 96.4 percent of GDP at March 2009 to $171 billion or 95.2 percent of GDP. However this was largely due to the revaluation of assets and liabilities as a result of the rising New Zealand dollar, which is hurting exporters. Our gross international liabilities stand at $306 billion, and both gross and net levels are significantly higher than in June 2008.

The value of exports and imports of goods dropped equally during the 3 months to June (by $771 million and $772 million respectively, seasonally adjusted), and there is not good news there on prices. Export prices dropped 11.6 percent during the quarter – the largest fall since the March 1957 quarter. Dairy prices fell 24.1 percent, and so did non-food manufactured goods and forestry products. Although the value of imports fell equally, their prices fell only 2.9 percent. There was a large fall in intermediate goods imports, reflecting the low activity levels in New Zealand firms. For the year there was a surplus on goods trade, but import prices rose 4.3 percent and export prices fell 9.4 percent.

“However in raw terms it is worth noting that net investment income of $1.600 billion for the quarter almost wipes out the net earnings from goods exports over imports of $1.768 billion,” said Rosenberg

“While dairy prices have risen since these June results, the falls in our export prices do not bode well for a recovery in New Zealand’s export sector. Despite selling higher volumes, export income is still retreating.”

ENDS

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