Posted: 
Thursday, 21 Nov 2019
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Personal (opinion)

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New Zealand's annual current account deficit currently sits at $10.6 billion, or 3.6% of GDP for the year ended March 2019, broadly in line with market expectations at the time of release, and broadly unchanged (in terms of % of GDP) since the Global Financial Crisis (GFC). Our balance is comparable to a range of developed countries with the notable exception of Germany, which has been consistently running current account surpluses (Figure 1).

Figure 1: Current account balance as % of GDP

Figure 15: Current account balance as % of GDP

Source: OECD

Current account reflects the balance on transactions with rest of the world…

The current account of the balance of payments records the value of New Zealand's transactions with rest of the world in goods, services, and primary and secondary income. The current account is the sum of the balances of these components, and in New Zealand's case has been consistently in deficit, at around 3% of GDP on average since the end of the GFC (Figure 2).

Figure 2: Current account and its components (annual)

Figure 16: Current account and its components (annual)

Source: Stats NZ

…goods balance impacted by commodity prices…

New Zealand's goods balance has been in deficit since early 2015 (Figure 3), with the value of imports exceeding the value of exports. A sharp contraction in imports during the economic downturn following the GFC was not matched by as large a fall in exports, as primary commodity markets were not as badly impacted, allowing New Zealand's goods balance to return to surplus until 2015.

Figure 3: Goods balance components (annual)

Figure 17: Goods balance components (annual)

Source: Stats NZ

Dairy products accounted for 25% of merchandise exports in the year ended June 2019, so it is little surprise that movements in global dairy prices have accounted for much of the movement in the value of merchandise goods exports in recent times (Figure 4). The fall in global dairy prices in 2014 and 2015 resulted from strong global milk supply, together with a tail-off in Chinese demand, leading to declining export revenues notwithstanding the continued expansion in milk production volumes over this period. This was enough to return the goods balance back to deficit, where it has remained since.

Figure 4: Exports and GlobalDairyTrade prices

Figure 18: Exports and GlobalDairyTrade prices

Sources: Stats NZ, GlobalDairyTrade

Global dairy prices have recovered somewhat since 2015, although they have yet to recover all of the ground lost from the bumper prices recorded in 2013. Easing growth in global milk supply combined with continued strength in demand (particularly from China) should see milk prices hold up over the coming year, providing further support for export revenues.

…services balance changes driven by tourism earnings…

Our trade in services balance has been consistently positive, primarily as a result of New Zealand's receipts from overseas tourists (services exports) outweighing New Zealand residents' spending overseas (services imports).

Tourism receipts for the year ended March 2019 accounted for approximately three quarters of New Zealand's services exports (Figure 5), and just over 20% of total export revenues, making it our largest single export earner.

Figure 5: Services balance components (annual)

Figure 19: Services balance components (annual)

Source: Stats NZ

Strong growth in international visitor arrivals since 2014 contributed to an increasing services surplus, although the growth in international visitor arrivals has tapered off in recent months.

Figure 6: International visitor spend share (annual)

Figure 20: International visitor spend share (annual)

Source: MBIE - International Vistor Survey

While Australia remains our major source of both visitors and revenue, China has become an increasingly important market, now accounting for around 15% of tourism receipts (Figure 6). Chinese visitors also tend to stay longer and spend more than their Australian counter-parts, with average spend per visitor in the year ended June 2019 of $4,300 for Chinese visitors compared with $2,000 for Australian visitors.

…incomes balance a function of financing costs on our accumulated balance of net liabilities…

Conversely our income balance (which includes interest payments, dividends and reinvested earnings) has been consistently in deficit, to the tune of around $10 billion in the year ended March 2019 (Figure 7), and reflects the fact that New Zealand is in a net liability position with the rest of the world. This deficit is almost entirely due to the negative investment income balance, with income paid out on foreign investment in New Zealand exceeding income received from New Zealand investment abroad.

Figure 7: Income balance components (annual)

Figure 21: Income balance components (annual)

Sources: Stats NZ, Haver Analytics

This net investment income deficit has accumulated as a result of the ongoing current account deficits recorded over time. In the year ended March 2019, New Zealand's net international liability position was $156.2 billion (55.5% of GDP). The sharp decline in global interest rates following the GFC served to moderate what had been a deteriorating income balance up to 2009.

Current account deficit needs to be financed

Any deficit must be funded, and the predominant source of funding for the current account balance over most of recent history has been through foreign investment in New Zealand (Figure 8). The impact of the GFC can be seen in 2009, when foreign investment flows reversed, with foreign firms (in particular banks) reducing portfolio investment in the form of debt securities from New Zealand.

Figure 8: Funding of current account balance (annual)

Figure 22: Funding of current account balance (annual)

Source: StatsNZ

The impact of the Canterbury earthquakes can also be seen in the year ended March 2011, with around $21 billion capital inflow into New Zealand from reinsurance claims, which appear in the financial account as a corresponding investment.

Current account funds the imbalance between investment and national savings

The current account deficit represents additional domestic investment that is able to be financed through the associated capital inflows, beyond what is able to be funded through domestic savings (Figure 9).

Figure 9: Investment / savings imbalance (annual)

Figure 23: Investment / savings imbalance (annual)

Source: Stats NZ

Country shares of international liabilities have remained relatively stable over the past decade, with Australia accounting for the around 29% of foreign investment in New Zealand in the year ended March 2018, followed by the United Kingdom (16%) and the United States of America (10%). Investment from Hong Kong and China has become more important in recent years, however remains at low levels.

Figure 10: International liabilities - top six country shares

Figure 24: International liabilities - top six country shares

Source: Stats NZ

In effect New Zealand is drawing on the global pool of savings to finance investment that would not otherwise have been possible. The largest source of external financing comes from foreign lending, with debt securities accounting for 38% of foreign investment in the year ended March 2018, while direct investment (ownership of more than 50% of a New Zealand business) accounted for a further 29% (Figure 11).

Figure 11: Foreign investment in NZ by type

Figure 25: Foreign investment in NZ by type

Source: Stats NZ

The share of foreign investment made up of debt securities has been steadily increasing over recent years. As global interest rates are at their current historically low levels, this serves to keep our financing costs (and hence income balance) in check, however should interest rates increase, this will impact relatively immediately on the current account balance. Given the softness in the current global growth outlook, we expect interest rates to remain at current (if not lower) levels over the near term, meaning the income balance should remain broadly stable.

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