Rising dollar puts spotlight back on NZ's current account

By NZPA

Tuesday 25th June 2002

As the kiwi dollar continues to flex its muscles, observers are keeping a more watchful eye on New Zealand's balance of payments figures.

Optimists are picking a slight surplus when the March quarter figures are released on Thursday.

On an annual basis the country should maintain its historical deficit, but expectations are for it to equate to a relatively low 3.1 percent of the country's gross domestic product -- down from 7 percent in mid-2000.

However, that's about as good as it will get. Both private and public sector economists expect the deficit to widen over the next few years.

"People tend to use it as a barometer of how safe are we investing in this country," says Westpac Bank treasury economist Nick Tuffley.

If the current account -- which measures New Zealand's foreign earning and spending including such items as interest payments -- starts increasing, people view it as a sign that it's getting difficult to sustain, Mr Tuffley said.

"They also get a bit worried about the risk that if foreign capital suddenly dries up, the exchange rate depreciates and if you're left holding an asset in a country where the exchange rate suddenly depreciates, it's suddenly worth a lot less."

Economists polled by Reuters forecast a median quarterly deficit of $245 million, with expectations ranging from a deficit of $145 million to a surplus of $265 million.

They say the expectation is not bad given the global downturn.

Westpac is picking that the economy will produce a modest surplus of $138 million, likening it to the conditions which created the tiny $19 million surplus in the March quarter last year -- the first quarterly surplus for seven years.

On an annual basis, the bank predicts the current account will be in deficit by around $3.68 billion -- 3.1 percent of the country's gross domestic product (GDP). That would still be the narrowest deficit for almost eight years.

Westpac expects the deficit will reach 5 percent of GDP by the end of the year and 5.5 percent some time next year, "quite good by historical standards", in a country where 6-7 percent is a level for concern, says Mr Tuffley.

Surpluses are both rare and seasonal, he says. The March quarter coincides with the end of the primary sector's export season and summer tourism.

Also helping to lessen the deficit are returns from New Zealand's foreign investment abroad, which are expected to be considerably better than a year ago.

Loss making assets had been cut loose, the robust Australian economy has steadily improved returns for offshore subsidiaries and New Zealand corporates have reduced their borrowings from offshore subsidiaries.

On the other side of the ledger, investment income paid to foreign investors from New Zealand assets would have also improved although not to the same extent, said Mr Tuffley. He is forecasting the smallest annual net outflow of investment income in two years.

The current account is notorious for springing surprises but the market is unlikely to react unless it deviates by at least $300 million from expectations.

Meanwhile, a Treasury report out today said the deficit was likely to widen to 5.3 percent of GDP by 2004.

It cited lower export and tourism earnings, due in part to a stronger kiwi dollar, which has risen 18 percent against the US dollar this year.

"The higher exchange rate will directly reduce export receipts relative to previous expectations, including farm incomes," the report said.

"The impact of the higher exchange rate will materialise more quickly in weaker service export volume growth, largely tourism."

Economists are predicting that GDP figures also due out on Friday will show the economy grew by a strong 1.1 percent in the March quarter, and 3.3 percent for the year.

The anticipated growth rate is expected to give the Reserve Bank further cause to raise the official cash rate.

Analysts are picking a rise of another 25 basis points early next month, offset by the kiwi currency's sharp rise.

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