New Zealand’s balance of payments deficit hits record $33.8 billion for year ended December

The country’s balance of payments deficit has blown out to its highest level in 34 years on the back of a large trade deficit and closed borders.

The deficit between what the economy earns and what it spends hit $33.8 billion for the year ended December, equating to a record 8.9 percent of the value of the economy, the highest since the current series began in 1988.

Broadly speaking, the country is living well beyond its means, which is filled by borrowing.

Stats NZ senior manager Paul Pascoe said the increased deficit was due largely to an increase in the import of goods and services, notably machinery, fuel and vehicles, and an increase in travel costs.

“Since New Zealand’s borders opened more New Zealanders have been travelling overseas. The spending on both air transport and travel contributed to the rise in services imports for the year.”

Imports grew 25.8 percent while export earnings were up only 16.8 percent, with tourism, a key foreign exchange earner, still hampered by the slow recovery in world travel after Covid-19 restrictions were lifted.

Another factor in the deficit was foreign investors making more out of their investments in Aotearoa than New Zealanders did from their overseas holdings.

The data also showed an inflow of $3.3b into the country in the final three months of the year, which covered part of the deficit, while New Zealand investors scaled back their overseas investments to the tune of $4b compared to a $686m reduction in foreign investments here.

The difference between New Zealand’s financial assets and liabilities with the rest of the world narrowed slightly to a deficit of $193b, about half the value of the economy.

The size of the balance of payments deficit matters to ratings agencies, which could downgrade New Zealand’s rating making borrowing more expensive if there were concerns it was getting out of control.

An overheated economy

Economists said the blowout in the deficit was one of the prices being paid for an overheated economy.

Westpac’s acting chief economist Michael Gordon said the country had not adjusted its spending to match the impact of Covid-19 disruptions to exports, such as the big slump in tourism earnings, while rising interest rates had increased the repayments on borrowings.

“Monetary and fiscal stimulus in response to the Covid shock has left the economy overheated, as demonstrated by the extremely tight labour market and the surge in inflation.

“Essentially, we haven’t adjusted our spending patterns to reflect either the shortfall in our export income or the rise in the cost of living.”

BNZ senior economist Doug Steel agreed, adding: “It looks unsustainable, suggesting something has to give”.

He said the deficit was headed to break 9 percent of GDP or higher, and that would likely attract the attention of credit ratings agencies, sooner or later.

And on cue, S&P Global Ratings raised its eyebrows at the size and persistence of the deficit.

It said the deficit was at an extremely high level and much wider than expected.

“We would need to see the current account deficit narrow over the next 12 to 18 months and if it doesn’t there is going to be increased pressure on the AA+ rating,” S&P director Anthony Walker told the Bloomberg news service.

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