Balance Of Payments Deficit Exposes NZ’s Vulnerability
March 12th, 2009
“Port Hit by Import Slump” should be a headline to please Finance Minister Bill English. It should signal a rapid improvement in NZ’s balance of payments, currently showing a deficit of 9% of GDP. But English is worried the deficit is not falling fast enough to remove NZ from the watch lists of international credit rating agencies. The BOP deficit puts NZ up there with Iceland, Spain, Greece, Portugal and some East European countries. This week a team from Moody’s was in Wellington, leaving English in no doubt the balance of payments deficit is seen as NZ’s major point of vulnerability. Moody’s currently rates NZ as “AAA” – its top rating – with a stable outlook, and told Ministers it is safe for the meantime but long-term debt projections are of concern.
Two other agencies Fitch Ratings and Standard & Poors have warned NZ runs the risk of a downgrade because of its deteriorating fiscal outlook. A downgrade would mean a significant rise in the costs of borrowing. This has lent urgency to a decision to suspend or trim the annual contribution to the NZ Superannuation Fund. While imports have been falling, the adjustment takes some time to work through. In January when imports showed the first decrease since August 2007, the monthly trade balance was a deficit of $187m, or 5.9% of exports. It was the smallest deficit for January month since 2001. Treasury believes it may be more than 12 months before the balance of payments trends down to a more comfortable 3-4% of GDP. The Reserve Bank thinks it may happen more quickly. Until then, NZ remains vulnerable.
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Duncan Cotterill