NZ's underlying debt problem much worse than headline figure

The country’s current account deficit appeared to improve with this mornings figures from Statistics New Zealand but a look at the underlying figure shows a less upbeat picture.

The annual current account balance is a deficit of 2.3% of GDP. While that looks like an improvement on the September figure of 3.1%, the September figure itself has been revised upward and now stands at 2.2% of GDP.

In dollar terms, the deficit for the year now stands at $4.38 billion.

But there are added factors to take into account.

Large one-off factors make the deficit look much better than it actually is. Firstly there were the payments from the Australian owned banks to the taxman after they lost a long running case with Inland Revenue. These total close to $2 billion.

The more recent large factor is the reinsurance payments from the Christchurch earthquake. These are double what was previously thought – $3.56 billion compared to $1.7 billion – hence the revision to the September figure.

Strip these out and the underlying current account deficit is still 4.1`% of GDP, or $7.94 billion.

That is much larger than would normally be expected at the bottom of the economic cycle.

The main reasons are tourists spending less money here, as well as a rise in profits for fully or partly overseas owned companies in New Zealand, and these profits being repatriated to owners.

Investment inflows, on the other hand, are up, mostly however because of the rise in government borrowing toward the end of the year.

There is some good news. The goods balance for the year improved, with a surplus of $3.4 billion, up $957 million on the previous year.

Net foreign liabilities fell 1.3 billion to $159 billion, a drop from 85.7% of GDP to 81.7 billion.

However, that too is affected by the reinsurance payments, as outstanding reinsurance claims are treated as an asset. If these are excluded, the New Zealand’s net debtor position is 83.7% of GDP.

TD Securities head of Asia-Pacific Research Annette Beacher said there were scant monetary policy implications from current account data, especially an outcome like this one that is sandwiched between massive reinsurance inflows.

"The NZD at $US0.74 is still too lofty in our view, but with positioning recent switching from net long to net short, it is difficult to see any downside relief in the near term," she said.