20 Sep 2012

NZ tipped to go deeper into the red

7:13 am on 20 September 2012

New Zealand is expected to go deeper into the red with the current account deficit as domestic demand for imports rises and the high dollar eats into export returns.

Official figures show the seasonally-adjusted current account deficit stood at $2.9 billion in the three months to June, due to a higher fuel bill and higher profits earned by Australian-own banks.

On an annual basis, the deficit widened to $10.1 billion, or 4.9%, of gross domestic product.

Economists worry that deficit, which means the country needs to borrow overseas to fund the shortfall, is getting close to levels that will prompt the interest of credit rating agencies.

UBS senior economist Robin Clements says many forecasters believe it will hit 6%.

"At 4.9% probably nothing much is going to happen, if it goes over and heads towards 6% we might get some commentary out of the rating agencies and it might have a dampening effect on the currency, but that's all ahead of us".

ASB economist Jane Turner says while the current account deficit is expected to peak at 6.5% before settling at 6%, it won't be of immediate concern to credit rating agencies.

She says while New Zealand's net debt position is expected to increase in coming years, the right moves are being made within each sector to limit that increase.

Ms Turner says the private sector is going through some adjustment reducing some of their external vulnerability, while the Government sector's accounts improves as New Zealand's economy recovers it will also reduce its reliance on offshore funding.

Net foreign liabilities edged up to $149 billion, or 73% of GDP, due to increased government sector net debt.