Balance of Payments and International Investment Position: Year ended 31 March 2009

Overview

This release brings together previously released quarterly statistics into year ended March totals. Additional tables, which have not previously been published, are included.

Included in this release:

• additional information on financial account flows and international investment position (IIP) stocks, disaggregated by country (tables 3 to 10)
• New Zealand's total international assets and liabilities, disaggregated by industry (table 11) – these have been created under the Australian and New Zealand Standard Industrial Classification (ANZSIC) 2006 edition methodology (see technical notes for more details)
• New Zealand's imports and exports of services by type (tables 12 and 13)
• hedging of New Zealand's foreign-currency denominated overseas debt (tables 14 to 16).

Review: the year ended March 2009

The current account deficit for the year ended March 2009 was $14.6 billion (8.1 percent of GDP), compared with a year ended March 2008 deficit of $14.1 billion (7.9 percent of GDP). The $0.4 billion increase in the deficit was due to a turnaround in the balance on services from a surplus to a deficit over this time. This was partly offset by smaller deficits on the balance on goods and the investment income balance.

The balance on services changed from a surplus of $0.2 billion in the March 2008 year, to a deficit of $1.1 billion in the March 2009 year – the first March year services deficit in eight years. Imports of services increased $1.1 billion, mainly driven by transportation services and other business services. Falls in exports of transportation and travel services were behind the decrease in total services exports in the March 2009 year.

The goods deficit was $1.3 billion in the March 2009 year, down from $1.8 billion in the March 2008 year. Exports of goods increased $5.5 billion, mainly due to an increase in food and beverages exports. This was in turn driven by exports of meat and dairy products, with prices for dairy products higher in the March 2009 year than in the March 2008 year. Imports of goods were up $5.1 billion over the same period, due to high prices for imports of petroleum and petroleum products, while imported volumes remained stable. World oil prices peaked in July 2008.

The investment income deficit was $0.3 billion smaller in the March 2009 year than in the March 2008 year. A fall in income earned by foreign direct investors from their shareholdings in New Zealand was partly offset by a fall in income earned by overseas subsidiaries of New Zealand companies.

A current account deficit requires a net inflow of capital to finance it. This can be a combination of a withdrawal of New Zealand investment from abroad, an inflow of foreign investment, or through inflows through the capital account. The net inflow of capital measured in the capital and financial accounts in the March 2009 year ($6.7 billion) was not sufficient to finance the $14.6 billion current account deficit. This resulted in a net errors and omissions (residual) of $7.9 billion for the year ended March 2009.

The residual indicates either overstatement of transactions reducing liabilities, or understatement of transactions reducing assets. The quarterly accounts show the largest impact on the residual occurred in the December 2008 quarter, at the height of the global financial crisis. In the December 2008 quarter release, Statistics New Zealand discussed the probable causes of the residual, which include measurement difficulties, and the non-measurement of some transactions.

Measurement difficulties arising from market price and exchange rate volatility lead to greater difficulty in separating the impact of revaluations from actual transactions, leading to their under or overstatement. Significant types of non-measurement of financial transactions and positions include transactions in financial derivative contracts, and investment by individuals in equity securities overseas. The large residual is consistent with the latest estimate for New Zealand-resident individuals' holdings of overseas shares. This estimate was $10.7 billion at 31 December 2007, and fell to $2.6 billion at 31 December 2008.

The March 2009 year residual of $7.9 billion means that the financial account does not fully explain the financing of the current account deficit. Therefore, the financial account must be viewed with caution for this period.

In the March 2009 year, the current account deficit of $14.6 billion was only partly financed by a net capital inflow of $7.3 billion during the period. This net inflow was made up of a $16.1 billion withdrawal of New Zealand investment from overseas, partly offset by an $8.9 billion withdrawal of foreign investment from New Zealand.
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The $16.1 billion withdrawal of New Zealand investment from abroad was mainly due to the official sector (Reserve Bank of New Zealand (RBNZ) and the New Zealand Treasury) drawing down reserve assets during the March 2009 year. This follows three years of reserve asset accumulation. Also, New Zealand banks withdrew loan assets from abroad, and New Zealand fund managers sold shares held in overseas companies.

The $8.9 billion withdrawal of foreign investment from New Zealand was the first time there has been an annual withdrawal of foreign investment since the current series began in the year ended March 2001. Portfolio investment outflows of $14.7 billion drove the overall withdrawal in the March 2009 year. The outflows were mainly driven by banking sector transactions reducing debt security liabilities. This was partly offset by an increase in net borrowing by New Zealand subsidiaries of foreign parents, combined with an increase in equity investment in the banking sector.

The reduction in debt security liabilities by the banking sector was partly funded through the RBNZ's expanded liquidity management facilities, for example the Term Auction Facility. Using this facility, banks can enter into security repurchase agreements with the RBNZ using approved securities (eg Residential Mortgage Backed Securities). Funding of these liquidity operations by the RBNZ included the unwinding of mostly short-term reserve asset positions, and is reflected in the $9.9 billion divestment of reserves transactions recorded in the March 2009 year.

The net international investment position (IIP) showed a net debtor position (liabilities exceeding assets) of $173.5 billion at 31 March 2009, a $21.8 billion (14.4 percent) increase from the net debtor position at 31 March 2008. The increase was driven by $14.5 billion of changes in the valuation of New Zealand’s financial assets and liabilities, combined with $7.3 billion of net financial account transactions.

Valuation changes arise from changes in exchange rates, market prices of assets and liabilities, changes in the market value of financial derivative contracts, and other changes such as write-offs. The large valuation changes from 31 March 2008 are a reflection of the financial instability and exchange rate volatility that New Zealand and the rest of the world have been experiencing over the last year.

The larger net debtor position at 31 March 2009 compared with 31 March 2008 was mainly due to an increase in the value of total foreign investment in New Zealand. There were significant increases in the value of both financial derivative assets and liabilities, which are held mostly by the banking sector. However, this increase was mostly offset by falls in other types of investment on the assets side, whereas there were no large falls in the value of our liabilities. 

Reconciling the March 2009 year financial account and the international investment position

The reconciliation table below shows both the transaction and non-transaction causes of the shift in the IIP from the position at 31 March 2008 to the position at 31 March 2009. The term IIP is defined in the technical notes of this publication along with the associated term net debtor position.

(1)    This table is prepared on a balance sheet basis.
(2)    Data may not add to stated totals due to rounding.

At 31 March 2009, New Zealand's net international debtor position was $173.5 billion, an increase of $21.8 billion (14.4 percent) from the 31 March 2008 net debtor position of $151.7 billion.

Changes in the value of New Zealand's assets and liabilities increased the net debtor position by $14.5 billion. A net $7.3 billion inflow of capital further increased the net debtor position.

Changes in the value of assets and liabilities arise from changes in exchange rates, market prices of assets and liabilities (eg shares), market values of financial derivative contracts, and other changes such as write-offs.

• Exchange rate changes. At 31 March 2008 one New Zealand dollar (NZD) purchased 79 US cents, while at 31 March 2009 one NZD purchased 56 US cents. A depreciation of the NZD against major currencies over the year caused the value of liabilities to increase by more than the value of assets. The overall effect was to increase the net debtor position by $5.3 billion.
• Market price and other valuation effects. Major overseas share indexes fell between 34 and 41 percent over the year ended March 2009, while the NZX 50 fell by 23 percent. This caused New Zealand's investment abroad to fall by more than foreign investment in New Zealand. The overall effect was to increase the net debtor position by $6.8 billion.
• Financial derivative valuation changes. The net effect was to increase the net debtor position by $2.4 billion. Financial derivative contracts in asset positions at 31 March 2009 were $15.0 billion higher than at 31 March 2008, while contracts in a liability position were $17.4 billion higher compared with 31 March 2008.
  

Review: the years since March 2004

The current account deficit of $14.6 billion in the year ended March 2009 is $7.9 billion larger than the deficit for the year ended March 2004. The growth in the deficit has been mainly driven by the investment income deficit, which has increased from $7.4 billion to $13.0 billion over this time. The balance on services has gone from a surplus in the year ended March 2004 to a $1.1 billion deficit, while the balance on goods is a similar-sized deficit in the latest year compared with the March 2004 year.

The balance on services shifted from a surplus of $1.7 billion in the March 2004 year to a deficit of $1.1 billion in the March 2009 year. Imports of services increased $3.8 billion, while exports of services increased $1.0 billion over this time. The change in the services balance was driven by expenditure of New Zealanders travelling abroad, which increased $1.3 billion between the March 2004 and March 2008 years, before falling slightly in the latest year. Meanwhile, foreign tourists' expenditure in New Zealand remained stable.

Increased transportation services imports (driven by higher expenditure on freight during the March 2009 year), as well as increased expenditure on other business services, also contributed to the change in the services balance from a surplus to a deficit. The higher freight payments are linked to the increased volumes of goods imported during the March 2009 year.

The balance on goods has improved $2.8 billion from its peak of a $4.1 billion deficit in the March 2006 year, and is now at a similar level to the goods deficit recorded in the March 2004 year. Increased exports of dairy products are behind this contraction of the deficit from the March 2006 year. However, dairy exports flattened in the March 2009 year, with exports of food and beverages (particularly meat) driving the increase in goods exports instead. Also, the Tui oilfield has been exporting oil since the end of the 2007 calendar year.

The investment income deficit widened steadily between the March 2004 and March 2008 years, before narrowing by $0.3 billion in the latest year. The smaller income deficit in the March 2009 year, compared with the March 2008 year, was due to income from foreign investment in New Zealand falling by more than income from New Zealand investment abroad. Both these falls occurred mainly within direct investment income, and were caused by decreased profitability of firms both here and abroad.

Foreign investors’ earnings from their investments in New Zealand increased from $9.8 billion in the March 2004 year, to $17.1 billion in the March 2008 year. Profits earned by foreign-owned New Zealand companies increased over this time, while interest paid on overseas debt also rose.

The current account deficit for the year ended March 2009 was partially funded by a withdrawal of New Zealand investment from abroad, which was somewhat offset by a withdrawal of foreign investment in New Zealand. Compared with previous periods, this is an unusual way for New Zealand to fund a current account deficit and partly reflects the RBNZ running down its overseas reserve assets. In the past, New Zealand’s current account deficits have mainly been funded by inflows of foreign capital through the financial account. These net inflows were mostly debt, rather than equity, and this is reflected in the net international debt figures.

New Zealand’s net overseas debt rose $72.7 billion from the March 2004 year to the March 2009 year. This was partly offset by a $7.7 billion fall in New Zealand’s net equity liability position. These movements resulted in a $65.0 billion (59.9 percent) increase in New Zealand’s net IIP liability position at 31 March 2009 compared with 31 March 2004. New Zealand’s net IIP liability position was $108.5 billion (77.5 percent of GDP) at 31 March 2004, compared with $173.5 billion (96.4 percent of GDP) at 31 March 2009.

The stock of New Zealand’s other investment liabilities has almost doubled over the last five years, to $88.6 billion. This has primarily been driven by an increase in borrowing, especially by the banking sector. Additionally, portfolio investment liabilities have become increasingly geared towards debt securities over this time.

At 31 March 2004, equity securities made up 20.1 percent of foreign portfolio investment in New Zealand (while the remainder consisted of debt securities), while at 31 March 2009 equity securities made up 11.1 percent of foreign portfolio investment. This change has been especially evident since the March 2007 year, and occurred mainly in the banking sector.

Trade in services

New Zealand’s trade in services with the rest of the world is a major component of the current account. Services are collected by type, with the main types being transportation services and travel services. Exports of services occur when a New Zealand resident provides a service to a non-resident. Imports of services occur when New Zealand residents purchase services from non-residents.

The balance on services was a deficit of $1,118 million for the March 2009 year, compared with a surplus of $184 million in the March 2008 year. The shift in the balance from a surplus to a deficit over this time was due to an increase in imports of services, combined with a decrease in exports of services.

Imports of services increased $1,142 million between the March 2008 and March 2009 years. An increase in imports of transportation services, driven by expenditure on sea freight, was a major contributor to this increase. This is linked to the higher value of goods imported into New Zealand during the March 2009 year. In addition, there was a $644 million increase in other business services. This was due to an increase in miscellaneous services expenditure (mainly in services related to oil exploration and production), as well as a rise in operational leasing payments made on ships, aircraft, and other large capital items.

Exports of services fell $159 million from the March 2008 year to the March 2009 year. There was a $202 million fall in travel services (which measures spending by overseas visitors in New Zealand), due to lower visitor numbers. Transportation services also fell over this time, mainly due to lower expenditure by foreign-owned ships and aircraft while in New Zealand ports. Rises in most other service categories partly offset these falls.

Investment by country

When interpreting country statistics, please note that the country of investment is the country in which the immediate counterparty resides, rather than the ultimate source or destination of the investment. This is further discussed in the technical notes section of this release.

Australia remains New Zealand’s main investment partner, both as a destination for New Zealand investment abroad, and as a source of foreign investment into New Zealand. Our other main investment partners are the United Kingdom (UK) and the United States of America (USA). Australia is our main investment partner for direct investment, while the USA and the UK are our main sources of portfolio investment. However, the relative proportions attributed to these countries have changed over time.

New Zealand held 62.9 percent of its international assets in our three main investment partner countries at 31 March 2009. This compares with 57.6 percent at 31 March 2008. New Zealand’s investment in the USA has increased $5.9 billion over this time, while investment in Australia and the UK remained relatively stable. Investment in the USA now represents 25.0 percent of New Zealand’s total international assets, up from 20.9 percent at 31 March 2008.

Australia accounted for $12.1 billion (50.4 percent) of New Zealand’s direct investment abroad at 31 March 2009, down from 53.4 percent at 31 March 2007. Since that time, New Zealand has increased its direct investment in the USA by $2.9 billion. Portfolio investment in Australia, the UK, and the USA was $6.0 billion lower at 31 March 2009 compared with 31 March 2007. The proportion of total portfolio investment that this represents has decreased from 67.8 percent to 62.4 percent. These three countries are where the majority of equity investment by New Zealand fund managers is placed.

The value of foreign investment in New Zealand was $299.6 billion at 31 March 2009, up $25.7 billion from 31 March 2008. At 31 March 2009, New Zealand’s three main sources of foreign investment accounted for $203.2 billion (67.8 percent) of total international liabilities. This compares with $178.3 billion (65.1 percent) at 31 March 2008. Investment sourced from the UK and the USA was up $9.3 billion and $5.6 billion respectively. This is mostly the result of an increase in the value of financial derivatives, as opposed to increased direct, portfolio, or other investment.

Foreign direct investment in New Zealand by Australia, the UK, and the USA was $60.8 billion at 31 March 2009, compared with $62.3 billion a year earlier. The proportion of total direct investment that this represents decreased from 70.0 percent to 65.5 percent between these two points in time. An increase in direct investment from Japan has contributed to the decreasing proportion sourced from New Zealand’s three main investment source countries.

The ‘other’ investment category comprises mostly loans and deposits. Australian other investment in New Zealand has increased by $21.1 billion since 31 March 2004, and at 31 March 2009 was $31.1 billion (35.1 percent of total other investment). Other investment from Australia was 21.1 percent of total other investment in New Zealand at 31 March 2004. The increase over this period mainly represents loans by Australian banks to their New Zealand subsidiaries.

For the year ended March 2009, the financial account measured $16.1 billion of transactions that were withdrawing New Zealand’s investment from abroad. This was mostly due to the RBNZ reducing its holdings of reserve assets over the year. New Zealand investors also withdrew $1.4 billion of portfolio investment from overseas, mainly from Japan and the USA. However, New Zealand increased its portfolio investment in Australia during the year ended March 2009.

Transactions by foreign investors withdrew $8.9 billion of their investment in New Zealand in the March 2009 year. There was a $14.7 billion withdrawal of portfolio investment out of New Zealand during the March 2009 year. This was mostly due to banks decreasing their portfolio liabilities in Europe, as well as a $5.3 billion fall in portfolio investment from the USA. This was partly offset by a rise in investment from Australia (mostly loans).

Also partly offsetting the fall in portfolio investment was a $6.1 billion inflow of foreign direct investment in New Zealand, mainly from Japan and the USA. Meanwhile, flows of foreign direct investment in New Zealand by Australia were significantly lower in the March 2009 year than in each of the previous five years. This represents a drop-off in merger and acquisition activity.

Investment by industry

Table 11 presents the stock of New Zealand’s total international assets and liabilities by industry, at 31 March 2009. The data is presented on a balance sheet basis, as opposed to an international investment position basis. The industry classification used is the ANZSIC 2006 edition.

At 31 March 2009, New Zealand’s total international assets were valued at $143.6 billion, a 3.5 percent increase from 31 March 2008. Most industries increased their holdings of international assets from 31 March 2008, with the finance and insurance industry an exception to this.

The finance and insurance industry’s holdings of New Zealand’s international assets fell for the first time since the series began at 31 March 2001. This industry held 62.5 percent of New Zealand’s international assets at 31 March 2009, compared with 65.1 percent at 31 March 2008. The main features of the fall were the RBNZ decreasing its holdings of reserve assets, and a fall in investment abroad by New Zealand fund managers.

The manufacturing industry’s overseas assets were valued at $17.5 billion at 31 March 2009. This is a $0.5 billion increase from the year ended March 2008, and manufacturing now holds 12.2 percent of New Zealand’s total assets abroad (12.3 percent at 31 March 2008). The public administration industry held $9.4 billion of overseas assets at 31 March 2009, down from $10.7 billion at 31 March 2008.

Hedging

At 31 March 2009, 91.9 percent of New Zealand's total foreign currency denominated external debt was hedged, compared with 92.2 percent at 31 March 2008 and 92.8 percent at 31 March 2007.

New Zealand's total foreign currency denominated external debt rose to $117.5 billion at 31 March 2009, from $109.9 billion at 31 March 2008. Of this debt at 31 March 2009, $108.0 billion (91.9 percent) was hedged, and $9.5 billion (8.1 percent) was not hedged.

Of the $108.0 billion hedged debt, 91.5 percent ($98.8 billion) was hedged by financial derivative contracts and 8.5 percent ($9.2 billion) was naturally hedged against foreign currency balance sheet assets and expected foreign currency receipts.

Of New Zealand's $117.5 billion foreign currency external debt at 31 March 2009, US dollar denominated external debt was $71.4 billion (60.8 percent) and Australian dollar denominated external debt was $22.0 billion (18.8 percent). At 31 March 2008, the US dollar denominated external debt was $59.1 billion and the Australian dollar denominated external debt was $16.3 billion.

For New Zealand's four major borrowing currencies (USD, AUD, euro, and JPY), hedging of the March 2009 year debt levels ranged from 86.4 percent (AUD) to 98.4 percent (euro).

Of the $71.4 billion in US dollar denominated external debt at 31 March 2009, $65.9 billion (92.3 percent) was hedged. Of the hedged debt, 92.4 percent was hedged using financial derivatives and 7.6 percent was naturally hedged against foreign currency balance sheet assets or expected foreign currency receipts.

Of the $22.0 billion Australian dollar denominated external debt, $19.0 billion (86.4 percent) was hedged. Of the hedged debt, 84.3 percent was hedged using financial derivatives and 15.7 percent was hedged by use of natural hedges against foreign currency balance sheet assets or expected foreign currency receipts. 

For technical information contact:
Wido van Lijf
Wellington 04 931 4600
Email: info@stats.govt.nz

Next release ...

Balance of Payments and International Investment Position: September 2009 quarter will be released on 22 December 2009