Some Positives From Record Kiwi Current Account Deficit

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By Chris Shaw

A record current account deficit of NZ$2.688bn for the March quarter and NZ$14.54bn over the past year is clearly not a sign of strength in the New Zealand economy, but market analysts and economists suggest it actually points to likely improvements in the longer-term.

While the deficit represents 9.3% of GDP and was higher than the 8.9% it had forecast, Citigroup suggests the downward pressure on the Kiwi currency expected from the result will help the future recovery of the trade balance, a trend it says is already occurring.

As the broker notes, both the March and April figures showed small trade surpluses, suggesting the tide has in fact turned. Official figures from the Reserve Bank of New Zealand don’t quite support this view though, the bank expecting the deficit to increase to 9.7% of GDP by the end of the year.

Stephen Koukoulas from TD Securities sides more with Citigroup’s assessment, suggesting the recent depreciation in the New Zealand dollar has improved the country’s competitive position, allowing the export sector to pick up. He does suggest any recovery will be slow though, as the export sector will take time to recover. Here his view is shared by Commonwealth Bank, who is also betting on a slow export recovery.

The bank suggests the risk to the deficit remains to the upside, which means there will be continued downward pressure on the currency. In contrast, Koukoulas suggests the New Zealand dollar is unlikely to fall much further, as it will be supported by the high level of interest rates and the unlikelihood of any cuts to official rates in the medium-term.

One positive according to Koukoulas is the deficit is not the result of poor government finances, as the government’s budget position remains favourable. He suggests, as does the CBA, the outcome is a reflection of private sector transactions, where New Zealand has paid more to foreigners on their investments in the country than has been received from New Zealand’s investments abroad.

As Citigroup notes, this means the high current account deficit should not impact on economic growth going forward.

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