20 Dec 2012

Current account deficit narrows to $2.5bn

7:55 am on 20 December 2012

The current account deficit has narrowed due to a fall in profits earned by foreign-owned companies in New Zealand.

The seasonally-adjusted current account deficit stood at $2.5 billion in the three months to September, compared with a revised $2.8 billion in the previous quarter, Statistics New Zealand figures show.

The current account deficit is the difference between what the country spends and what it earns overseas.

The income deficit - measuring dividend and interest payments - fell slightly as New Zealanders paid less in interest to Australian-owned banks.

On an annual basis, the deficit stood at $9.9 billion or 4.7% of Gross Domestic Product (GDP), up from 4.3% the same time a year ago, as imports rose faster than exports.

Net foreign liabilities edged down to $148.4 billion, or 71% of GDP.

On Tuesday the Treasury forecast the deficit to rise to 6.5% GDP by 2017.

UBS senior economist Robin Clements said the current account deficit was slightly lower than expected as a proportion of GDP and was under the 5% figure at which markets and credit ratings agencies start to get nervous.

But he said a fall in the deficit is likely to be temporary, a pause in an otherwise deteriorating trend over the next couple of years.

Mr Clements said there will be headwinds including the exchange rate and tepid growth offshore, so exporters will struggle. As rebuilding in Christchurch ramps up there will be greater demand for imports.

Mr Clements believes the current account deficit is likely to move above 5% of GDP in the next couple of quarters.

He said if it goes over 6% of GDP there may be some "sabre rattling" from credit rating agencies, which may also work to get the exchange rate down.

Ratings agencies have voiced concerns about New Zealand's high foreign debt, although Standard and Poor's and Fitch Ratings reaffirmed their AA ratings for New Zealand earlier this year.