Economists stunned by record BOP quarterly surplus

By NZPA

Thursday 27th June 2002

"Now this is a surplus," an institutional bank declared after New Zealand posted its biggest recorded quarterly balance of payment surplus today.

A March quarter current account surplus of $732 million , compared with a December deficit of $1.69 billion, caught everyone by surprise.

Market expectations were for a median deficit between $140-200 million.

Expectations were also astray for the annual deficit -- $3.97 billion, or 3.3 percent of gross domestic product (GDP), was expected. In fact, the result was $2.6 billion, or 2.2 percent of GDP -- the lowest proportion of GDP for 13 years.

Economists were gobsmacked. "A shockingly good number," said Robin Clements, chief economist at UBS Warburg.

"My immediate thought was, `Oh dear, have they made a mistake?'."

"It's the best quarterly surplus we've ever had," added National Bank economist Cameron Bagrie. "I think the next best was about $300 million in 1989. This number is quite huge. But the interesting thing is in terms of where it's coming from."

The current account -- which measures New Zealand's foreign earning and spending, including investments and interest payments -- was driven largely by an increase in tourism spending.

That pushed up the goods and services surplus, and there was also a big improvement in earnings from offshore investment, particularly from the roaring Australian economy.

Conversely there was a smaller outflow of investment income payments, partly because New Zealand corporates have reduced their debt levels and cut off non-performing overseas subsidiaries.

Current account figures are notoriously volatile and the March quarter benefits from summer tourism and export season figures.

Even so, the exceptional surplus is expected to have a positive effect on the New Zealand currency, which rebounded nearly half a cent to US49.05c after the news. It had slumped nearly a cent overnight on the jitters caused by a crisis at US phone company WorldCom.

Analysts were complimentary about the breadth of improvement.

"It looks like the trade balance is very strong, our tourism sector is very strong but your net investment income balance -- normally the drag or the noose around our neck -- has basically collapsed in this quarter," said Mr Bagrie.

"I haven't seen the detail but I suspect it's the fact our overseas returns are finally starting to get off their backsides."

Grant Fitzner, senior economist at HSBC, said the higher dollar would help reduce the amount of debt repayments offshore but he doubted that could account for most of the increased investment income.

New Zealand's net international investment position improved by $912 million to a deficit of $92.3 billion.

The investment income deficit -- measuring the net flow of income derived from foreign assets -- improved by $1.2 billion over the past year, suggesting that New Zealand's foreign assets have become relatively more profitable.

While this latest result is excellent news for the pre-election Government, the strong result is not expected to last. Surpluses are rare, and today's was only the second in eight years.

Economists said the deficit would almost certainly widen by year's end.

"We are in a good position going forward, but with a rising exchange rate we will be exporting slightly less and importing slightly more and the current account will widen out to around 4 percent of GDP this year, and towards 5 percent of GDP over 2003," Westpac senior economist Nick Tuffley said.

However, by historical standards, this was still within internationally accepted levels, as opposed to the "alarming" peaks of 7 percent in mid-2000.

A stronger dollar would lower tourism spending and numbers, and take its toll on export earnings, Darren Gibbs of Deutsche Bank said.

He was picking the current account to rise to 3.5 percent of GDP this year and between 4-4.5 percent next year.

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