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External Accounts Infer Higher Saving



Annual external deficit narrows further
Despite much lower dairy export revenues
Booming tourism, lower import prices part of
the picture
So too better debt servicing ratios
It all supports a decent Q2 GDP print tomorrow
NZ’s net liability position still large, but net debt
at 13 year lows



Goods Exports A Major Positive For Q2 GDP
Qtly %
change (s.a.)
Merchandise Export Volumes
15
BOP deflated
by OTI prices
10
SNA
5
0
The New Zealand economy continues to generate
macroeconomic figures that are difficult to fault. Growth is
strong, with tomorrow’s numbers highly likely to confirm it
has pushed further above trend. This has flowed through
to employment expansion and the unemployment rate has
fallen to below average. Real wages are rising. The fiscal
accounts are in balance. Inflation is low (although some
see that as a problem). And, as today’s numbers confirm,
even the nation’s usual Achilles Heel – the annual external
deficit – has become somewhat less of a burden. Yes, a
bit more productivity growth would be good, but, then
again, wouldn’t it always?!
NZ’s current account deficit narrowed to 2.9% of GDP in
the year ended June 2016 from the 3.1% (revised from
3.0%) a quarter earlier. This was a mild disappointment for
the market that was anticipating the annual deficit to be
2.6% of GDP (we had 2.7%).
Some of the miss can be put down to historical revisions,
with the rest due to a wider quarterly deficit in Q2 itself.
The latter was driven by more spending by New
Zealanders travelling overseas, boosting imports of
services in the quarter. And, for us at least, imports of
goods were materially higher than we had factored in
(chiefly on balance of payments conceptual adjustments
OTI
-10
Mar-98
Mar-00
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Mar-12
Mar-14
Mar-16
Quarterly
Source: Statistics NZ, BNZ
to the already published merchandise trade figures).
Exports of services in the quarter were weaker than we
thought, while there is more evidence that goods export
volumes will be very strong in tomorrow’s GDP accounts.
All this does not change our Q2 GDP estimate for
tomorrow, which stays at +1.2% q/q. But the new
colour on imports and exports above, does rein in our
expenditure based measure that was getting very strong
indeed. With today’s trade figures, our expenditure-based
GDP estimate now sits at +1.3% q/q. This all suggests
there is some upside rise to the +1.1% q/q market
expectation for tomorrow’s Q2 GDP figure and a bit
more to the RBNZ’s August MPS’s +0.8% view.
It is not clear how the current account figures compare
to RBNZ forecasts, given the Bank does not publish a
quarterly track. What we do know is that the current
account deficit is smaller than the 3.2% of GDP shortfall
that the RBNZ forecasts for the year to March 2017.
Bop Goods Imports Stronger Than Trade Data Implied
Current Account Deficit Expected To Narrow Further
Qtly %
change (s.a.)
Current Account Balance
Annual total
% of GDP
0
-5
Merchandise Import Volumes
20
Forecasts
-1
15
-2
10
-3
BOP deflated
by OTI prices
5
-4
0
-5
-5
-6
SNA
-10
OTI
-7
-15
-8
-9
00
01
02
Source: Statistics NZ, BNZ
03
04
05
06
07
08
09
Quarterly
10
11
12
13
14
15
16
17
18
-20
Mar-98
Mar-00
Source: Statistics NZ, BNZ
Mar-02
Mar-04
Mar-06
Mar-08
Quarterly
Mar-10
Mar-12
Mar-14
Mar-16
If indeed this quarter is a touch under the Bank’s forecasts
then, at the margin, it might provide the Bank will a little
less discomfort regarding the strength of the NZD. But we
cannot be sure and there does look much in it in any
event.
Beyond the quarterly wiggles, the current account deficit
is still trending narrower. This is a significant result in the
context of much lower dairy export receipts following a
major slump in international prices. Over the past year,
there have been many other influences on the external
accounts including:
Services Trade More Than Offsetting Goods Trade
Annual $b
Goods and Services Trade Balances
6
Services trade balance
4
2
0
-2
Goods trade balance
-4
-6

Booming tourism (with overseas visitors spending far
more than New Zealanders do overseas despite the
latter reaching a record in the latest quarter).

Expanding export education

Lower interest rates and lower debt ratios providing
relief on the nation’s debt

Lower oil prices significantly reducing the nation’s
import bill

Generally subdued import prices, given their often
deflationary capital and technological concentration
as well as economic slack globally
All these and other developments are reflected in the
major current account aggregates:

Goods trade: annual deficit of $2,366m in the year to
June 2016 from an annual deficit of $1,428m a year
earlier.

Services trade: annual surplus of $4,390m in the year
to June 2016 from an annual surplus of $2,815m a
year earlier.

Investment income: annual deficit of $8,422m in the
year to June 2016 from an annual deficit of $9,498m
a year earlier. Lower income earned from foreign
investment in New Zealand is part of this as is the
lower cost of servicing the nation’s debt via lower
global and domestic interest rates.
Current Account Components
Annual total
% of GDP
6
Quarterly
It is important to note that many of the large influences
detailed above have their origin offshore which is well
beyond the control of New Zealand. But the crux to how
these things influence the external deficit is how the
nation collectively responds to such developments.
Ultimately, the nation’s external deficit is the difference
between how much the country saves and how much
it invests.
New Zealand’s national saving has increased markedly
over recent years. Indeed, from just under $1b in the year
to March 2009, national saving lifted to almost $15b in the
year to March 2015 (the latest official data). Our estimates
suggest national saving lifted further to $17b in the year
to March 2016 and indicators point to a further lift is
occurring in the current March year. National savings is
still shy of national investment. But the large increase in
national saving over recent years has been more than
the increase in national investment, such that the gap
requiring funding from offshore has diminished – aka the
current account deficit has narrowed (and even more so
as a share of the economy).
While the increase in national investment has been
decent, it has perhaps been held back by such things
as a general sense of uncertainty surrounding the world
economic outlook.
National Saving Has Lifted
External Balances
Annual
$NZm
Forecasts
Goods and
Services
4
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Source: BNZ, Statistics NZ
National Saving
ex depreciation
20,000
BNZ
estimate
18,000
2
16,000
14,000
0
Current Account
-2
12,000
10,000
-4
8,000
-6
Investment
Income
-8
6,000
4,000
-10
2,000
-12
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Statistics NZ, BNZ
Quarterly
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Statistics NZ
March year
We see the annual deficit remaining at 2.9% in Q3 but
remain of the view that the current account deficit will
narrow further over the coming 12 to 18 months, towards
2% of GDP. Such a deficit would be well less than its
4.2% 10-year average. There are obviously many moving
parts and global risks abound. But it is a benign outlook.
It is certainly a lot more benign than many, including from
officials, forecasts from a year or two back. Back then it
was not unusual to see annual current account deficit
forecasts of well in excess of 5% of GDP. It simply has
not occurred. We were always a bit skeptical of such an
extreme blowout in the external accounts. Progressively
over the past year such views have been adjusted as the
influences discussed above played out.
Now with international dairy prices swinging sharply
higher, there seems more chance that the current account
deficit will narrow further. But there are many other
factors including long term international interest rates
attempting to push off extreme lows. We are also wary
that New Zealand’s buoyant economy might generate
materially more investment (and import) activity than we
current anticipate such that the current account deficit
does not narrow as much as we think.
New Zealand’s international net liability position (IIP)
remains large and is a source of vulnerability. It stood
at 64.9% of GDP in Q2. The nudge wider in the quarter
(from 63.9% in Q1) was mainly due to gains in the NZ
share market that lifted the value of overseas-owned
shares. While such revaluation dynamics seem to have
arrested the downtrend in the IIP of late, the IIP as a share
of the economy remains well below its peak over 80%
during 2008/09.
Yes, there have been concerns around the level of house
prices and associated debt, as well as dairy sector debt
especially since that sector’s incomes were hit hard by
lower prices. But it is notable that New Zealand’s external
debt as a whole eased down to 56.3% of GDP as at June
2016, from 56.7% in the previous quarter, to match that of
six months ago, which was the lowest external debt ratio
since 2003.
Revaluations Driving The IIP At Present
Net International Investment Position
% of GDP
-50
-55
-60
-65
-70
-75
-80
-85
-90
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
Quarterly
Source: Statistics NZ, BNZ
As External Debt Declines
NZ Net External Debt
% of GDP
90
85
80
75
70
65
60
55
50
Quarterly
Source: Statistics NZ, BNZ
Helping To Reduce Debt Servicing Burden
Foreign Debt Servicing
As % of exports of
goods and services
25
20
Lower debt ratios and
interest rate relief
15
10
5
0
01
More saving, a smaller current account deficit and a lower
debt to GDP ratio provide the country with better buffers
to international shocks than before. Such things will be
viewed positively by the rating agencies. Maybe, just
maybe, New Zealand’s Achilles Heel might be on the
mend.
02
03
04
05
Source: Statistics NZ, BNZ
[email protected]
06
07
08
09
Quarterly
10
11
12
13
14
15
16
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