Search

RPT-UPDATE 3-NZ Q1 current account deficit narrows

Reuters - Friday, June 26

* NZ current account deficit narrows as imports slide

* NZ year-to-March deficit 8.5 pct of GDP, down from 9.0 pct

* Deficit seen continuing to decline, but slowly

By Mantik Kusjanto

WELLINGTON, June 25 - New Zealand's current account deficit narrowed in the first quarter as imports collapsed amid a recession, but at 8.5 percent of gross domestic product the gap was still seen a barrier to lowering interest rates further.

The annual current account deficit fell to NZ$15.25 billion in the March quarter, from NZ$16.11 billion in the previous quarter, data showed on Thursday, pointing to a slow improvement in the country's external position.

The data was just above expectations in a Reuters poll forecast, and further gradual improvement is expected.

Rating agency Standard & Poor's, which has cited the large current account deficit as a risk to its AA-plus credit rating, upgraded the outlook to stable from negative in May after the government tightened its budget with spending cuts.

"Having a large external deficit and a growing budget deficit means the authorities cannot be complacent," said Su-Lin Ong, senior economist at RBC Capital Markets.

"That, in turn, is a constraint on how much further the RBNZ can cut rates. We think they're done now."

New Zealand relies on foreign borrowing to fund its deficit because of low levels of household saving. But the global recession has curbed demand for high-yielding currencies, such as the kiwi dollar, putting pressure on its credit rating and currency early this year.

The RBNZ left rates on hold this month, pausing after an aggressive string of cuts took the benchmark rate to a record low 2.5 percent. Most analysts in a Reuters poll expect rates to remain on hold well into 2010.

Governor Alan Bollard said this month New Zealand's economy was near its low point and should start growing by the end of the year, but strength in the New Zealand dollar <NZD=> could derail a recovery. Since early March, the local dollar has risen almost 30 percent against the U.S. currency.

The New Zealand dollar <NZD=> was unmoved by the numbers, and was trading around $0.6400.

The seasonally adjusted deficit for the March quarter narrowed to NZ$2.68 billion from NZ$3.72 billion in the fourth quarter as imports fell, helping turn the goods balance into a surplus, Statistics NZ said.

"The current account is moving in the right direction, but at a very slow pace, and the improvement was driven by a collapse in imports, which cannot be sustained going forward," said Khoon Goh, senior economist at ANZ-National Bank.

The services balance also narrowed as earnings from tourism improved.

The government agency said the deficit equated to 8.5 percent of GDP, on an expenditure basis, compared with a revised 9.0 percent in the previous quarter and above the Reserve Bank of New Zealand's own forecast of 8.2 percent.

The central bank has said it expects the deficit to continue declining over the next three years to 5.6 percent in 2012.

For a graphic on current account to GDP ratio and trade balance see http://graphics.thomsonreuters.com/069/NZ_CRACC0609.jpg

The annual current account deficit peaked at 9.3 percent in the first quarter of 2006. New Zealand's current account deficit was about twice as much as neighbouring Australia's.

Related Articles: Business