Balance of Payments and International Investment Position: September 2008 quarter

Overview

The seasonally adjusted current account deficit was $4,079 million in the September 2008 quarter, smaller than the June 2008 quarter deficit of $4,650 million. The $571 million narrowing of the deficit in the latest quarter was due to a contraction of the investment income deficit, combined with an increase in the value of exports of goods. The decrease in the investment income deficit was partly offset by an increase in imports of goods and a decrease in exports of services.

The investment income deficit, which is not seasonally adjusted, was $3,248 million in the September 2008 quarter, $396 million smaller than in the June 2008 quarter. The decrease in the deficit was driven by a fall in income earned by foreign investors from their shareholdings in New Zealand companies, while income from investment abroad remained relatively stable.

The seasonally adjusted balance on goods in the September 2008 quarter was a deficit of $898 million. Exports of goods were up $408 million, and imports were up $226 million, compared with the June 2008 quarter.

For the year ended September 2008, the current account deficit was $15,509 million (8.6 percent of GDP). This compares with a deficit of $14,982 million (8.4 percent of GDP) for the year ended June 2008, and $14,892 million (8.7 percent of GDP) for the year ended September 2007. Since the year ended September 2007, the goods deficit has decreased $912 million, while the investment income deficit has increased $867 million. The balance on services went from a surplus of $430 million for the year ended September 2007, to a deficit of $471 million for the year ended September 2008. 

 

The September 2008 quarter current account deficit was financed by a $5.4 billion net inflow of financial capital. The net inflow comprised a $4.7 billion withdrawal of New Zealand's assets from abroad, and $0.8 billion of foreign investment in New Zealand. The withdrawal of foreign assets was driven by the official sector divesting a net $5.5 billion of reserve assets.

New Zealand's 30 September 2008 net debtor position of $165.9 billion was $7.4 billion (4.7 percent) larger than at 30 June 2008. The September quarter saw significant volatility in exchange rates and asset prices. These effects contributed $2.0 billion to the increase in the net debtor position, arising from the depreciating New Zealand dollar, falling share prices in New Zealand and overseas, and changes in the value of financial derivative contracts.
The $14.8 billion (9.8 percent) rise in New Zealand's net debtor position from 30 September 2007 was driven by a $18.4 billion rise in net overseas debt, partly offset by a $3.6 billion fall in the net equity debtor position. Net overseas debt is now $154.1 billion, representing 85.8 percent of GDP.

Trend

The current account balance trend shows the deficit widening over the past year, to over $4 billion in the September 2008 quarter. This is mainly due to a widening goods and services balance trend.

The larger goods and services deficit trend value, compared with the December 2007 quarter, is due to increasing imports of goods over this time combined with rising fuel costs. The latest quarter shows the largest goods and services trend deficit for any period.

Partly offsetting the increasing goods and services trend is the income and transfers deficit trend, which has decreased since the June 2008 quarter. However, this remains at over $3 billion, and has been increasing since the December 2003 quarter.

Goods

All references are to seasonally adjusted figures unless otherwise stated.

The goods balance was a deficit of $898 million in the September 2008 quarter, $180 million smaller than the June 2008 quarter deficit. Exports of goods rose $408 million between the June 2008 and September 2008 quarters, while imports of goods rose $226 million.

The increase in the value of exports of goods was the result of higher merchandise export prices in the latest quarter. A rise in the value of forestry products exports was the main driver behind the higher exports figure. Increasing prices for dairy products (up 7.4 percent) also contributed to the higher value for goods exports, but this was partly offset by a fall in volumes. All goods export categories (as listed in the Overseas Trade Indexes: September 2008 quarter release) recorded price increases this quarter, while volumes were down for all categories except forestry products.

The value of imports of goods was $11,897 million for the September 2008 quarter, compared with $11,671 million for the June 2008 quarter. This increase was mainly due to a rise in import prices (up 11.1 percent – the largest quarterly increase since the September 1984 quarter), with higher prices for petroleum and petroleum products (up 31.0 percent) as the main driver. The increase was partly offset by a fall in volumes.

The actual goods balance for the year ended September 2008 was a deficit of $2,262 million. This deficit was $912 million smaller than the year ended September 2007 deficit of $3,174 million. Exports of goods have increased by $7,621 million over this period, mainly due to higher prices for dairy products. Imports of goods have increased $6,710 million, driven by petroleum and petroleum product prices. 

Services

All references are to seasonally adjusted figures unless otherwise stated.

The services balance was a deficit of $237 million in the September 2008 quarter. This compares with a deficit of $216 million in the June 2008 quarter and a surplus of $77 million in the September 2007 quarter. The widening of the services deficit in the latest quarter was due to exports of services decreasing by more than imports of services.

Exports of services fell $62 million over the quarter, mainly due to a $111 million decrease in travel services. Exports of travel services measures the expenditure of foreign tourists in New Zealand. The number of visitors to New Zealand increased between the June 2008 and September 2008 quarters, but visitors stayed for shorter periods, and on average spent less per person. Revenue received from other business services, which includes services such as management fees, and agricultural and mining services, also decreased. Other business services are not seasonally adjusted. 

The value of imports of services was $3,367 million this quarter, a decrease of $42 million from the June 2008 quarter. Expenditure on other business services fell by $146 million in the September 2008 quarter, due to decreased spending on services related to oil production and exploration. This follows a $281 million increase in other business services for the previous quarter, which was also driven by services related to oil production and exploration. Partly offsetting the decrease in other business services was a $43 million rise in transportation services, mainly due to higher prices for freight-related services, driven by the high cost of fuel. Imports of travel services were down $3 million in the September 2008 quarter, after falling $25 million in the June 2008 quarter. There were fewer short-term New Zealand resident departures in the latest quarter. This is only the third fall in imports of travel services since the March 2004 quarter.

The year ended September 2008 balance on services was a deficit of $471 million, compared with a deficit of $138 million for the year ended June 2008, and a surplus of $430 million for the year ended September 2007. Prior to the year ended June 2008, the balance on services had not been a deficit since the year ended June 2001. The recent deficits are due to exports of services remaining relatively stable over the last two years, while imports of travel and freight services have increased.

Investment income

The September 2008 quarter investment income deficit of $3,248 million is $396 million smaller than the June 2008 quarter deficit. Foreign investors' earnings from their investments in New Zealand were $362 million lower in the September than the June 2008 quarter, while New Zealand investors' earnings from abroad were up by $34 million.

Investment income from abroad has remained relatively stable over the last three quarters and was $770 million for the September 2008 quarter. The rise in income earned from New Zealand's investments abroad this quarter was mainly driven by a $74 million rise in dividends and interest earned from New Zealand's portfolio investments abroad. This rise was partly offset by falls in earnings from overseas subsidiaries of New Zealand direct investors, and lower interest earned from lending to abroad.

Foreign investors' earnings from their investments in New Zealand were $4,018 million in the September 2008 quarter, down $362 million from the June 2008 quarter. The key feature was a fall in income earned by foreign direct investors and portfolio investors from their equity investments in New Zealand companies. Profits earned by foreign direct investors fell by $152 million and dividends paid to foreign portfolio investors fell by $109 million.

The year ended September 2008 investment income deficit of $13.7 billion is $198 million smaller than the June 2008 year ended deficit. This is the first fall in the year ended investment income deficit since the March 2007 year. New Zealand's earnings from investments abroad fell by $209 million, and foreign investors' earnings from investments in New Zealand fell by $407 million. The fall in earnings by foreign investors was driven by a $340 million fall in profits earned by foreign direct investors and a $84 million fall in dividends paid to foreign portfolio investors.

The September 2008 year income deficit is $867 million larger than the September 2007 year ended deficit of $12.8 billion. A rise of $992 million in interest on overseas debt was the main contributor, and was related to the rising level of overseas debt.

Current transfers

Current transfers are offsetting entries to transactions where goods or services are supplied or received without there being an exchange of equal value in return, such as taxes or donations. The balance on current transfers was a surplus of $286 million for the September 2008 quarter, a decrease of $29 million from the June 2008 quarter surplus.

Current transfers into New Zealand were $712 million in the September 2008 quarter, a $68 million increase from the June 2008 quarter. This increase was due to a rise in non-resident withholding tax (NRWT) received. NRWT is payable by foreign investors on their withholding income (such as dividends and interest) received from their investments in New Zealand. There is often a lag between dividends declared and NRWT, as the tax is not due until a month after a dividend is paid.

Current transfers out of New Zealand were $426 million in the September 2008 quarter, up from $328 million in the June 2008 quarter. This increase was mainly due to rises in both private and official international aid.

Capital account

The capital account measures the value of assets transferred by migrants into, and out of, New Zealand, as well as the purchase and sale of intangible assets. The capital account balance was a deficit of $200 million for the September 2008 quarter, a $41 million narrowing from the June 2008 quarter deficit.
Inflows of capital transfers increased $4 million in the September 2008 quarter compared with the June 2008 quarter. An increase in the number of permanent and long-term arrivals to New Zealand was partly offset by a fall in the amount of funds invested in New Zealand by migrants. Capital transfers out of New Zealand were down by $37 million this quarter, due to fewer people emigrating from New Zealand to Australia.

Financial account and international investment position

Financial account (flows)

In the September 2008 quarter, a $5.4 billion net inflow of capital financed New Zealand’s current account deficit. For a second consecutive quarter, the inflow was primarily due to a withdrawal of New Zealand assets from abroad. This withdrawal of $4.7 billion was added to by $0.8 billion of foreign investment into New Zealand.

The withdrawal of New Zealand investment from abroad was driven by a net $5.5 billion divestment of reserve assets by the official sector (Reserve Bank of New Zealand and the New Zealand Treasury). This is the first divestment of reserve assets since the March 2005 quarter. New Zealand fund managers also divested from abroad in the September 2008 quarter, primarily by selling shares in overseas companies. These divestments were partly offset by New Zealand banks investing in overseas-issued debt securities and deposits abroad.

Foreign investment in New Zealand in the September 2008 quarter was driven by foreign direct investment of $2.3 billion. Of this, $1.8 billion was net borrowing by New Zealand subsidiaries from their overseas parent companies. In addition, overseas portfolio sharemarket investors bought New Zealand company shares. These investments in New Zealand companies were mostly offset by a $2.0 billion divestment from New Zealand-issued debt securities, primarily debt securities issued by the New Zealand banking sector and the New Zealand Government.

Reconciling the September 2008 quarter financial account and the international investment position

At 30 September 2008, the net debtor position was $165,851 million, an increase of $7,411 million (4.7 percent) from 30 June 2008. Net transactions increased liabilities by $5,404 million and net valuation changes added a further $2,007 million. Valuation changes 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.

• The main causes of the valuation effects in the September 2008 quarter were:
  
  Global share-price falls. The major sharemarkets in which New Zealand funds are invested fell in value. The effect was to reduce the market value of New Zealand's investments in overseas company shares.
• Large currency movements. The New Zealand dollar (NZD) depreciated against most of the foreign currencies in which New Zealand's foreign assets and liabilities are held. For example, against the United States dollar, the NZD depreciated by 12.4 percent. The depreciation of the NZD increases the NZD value of foreign currency assets and liabilities. At 30 September 2008, New Zealand's foreign currency liabilities exceeded its foreign currency assets. The net effect was an increase in the net debtor position.
• Changes in financial derivative contract values. The effect of changes in exchange rates can be offset by financial derivative contracts. Large exchange rate movements can significantly change the value of such contracts. Comparing the positions at 30 September 2008 and 30 June 2008, a $2.4 billion rise in the net asset position of financial derivative contracts virtually offset the net effect of exchange rate changes on New Zealand's net debtor positionInternational investment position

Significant volatility in exchange rates and market values can mean greater difficulty in measuring their impacts, leading to under or overstatement. This may be a contributing factor to the higher-than-usual net errors and omissions (residual) in the September 2008 quarter.

International investment position

This commentary discusses the presentation of New Zealand's international assets and liabilities as shown in tables 10 to 13 of this release.

At 30 September 2008, New Zealand's net debtor position of $165.9 billion was composed of $131.2 billion of international assets and $297.1 billion of international liabilities. The 30 September 2008 position was $7.4 billion (4.7 percent) larger than the 30 June 2008 position, and $14.8 billion (9.8 percent) larger than the 30 September 2007 position. 

Since 30 September 2007 the net international debt position has steadily increased and has driven the growth in the net debtor position. Net international debt at 30 September 2008 was $154.1 billion, up $6.4 billion from 30 June 2008, and up $18.4 billion from 30 September 2007. Over this same period the net international equity debtor position has been relatively stable, ranging between $15.4 and $10.7 billion.

Of total net international debt, the banking sector held 77.4 percent at 30 September 2008, compared with 79.3 percent at 30 June 2008. The net debt of the corporate sector has remained at about 28 percent of total net debt over the same period. At 30 September 2008, net lending abroad by the general government and monetary authorities sectors combined was $8.5 billion, down $2.8 billion from 30 June 2008.

New Zealand's net foreign debt is held in a variety of currencies, including the New Zealand dollar. The proportion of net international debt repayable in foreign currencies has risen. At 30 September 2008, this proportion was 42.2 percent, compared with 37.7 percent at 30 June 2008, and 37.3 percent at 30 September 2007.

Revisions

The tables below present a summary of revisions to the June 2008 quarter BoP and IIP major components, as a result of new or improved data.

Current and Capital Accounts
Component	Previously published  June 2008 quarter	Revised  June 2008 quarter	Magnitude of revision
NZ$(million)
Current account credits	15,618	15,613	-5
Current account debits	19,529	19,539	10
Current account balance	-3,911	-3,925	-14
Goods credits	11,343	11,340	-3
Goods debits	11,411	11,419	8
Goods balance	-68	-79	-11
Services credits	2,907	2,894	-13
Services debits	3,350	3,412	62
Services balance	-444	-518	-74
Income credits	725	736	11
Income debits	4,439	4,380	-59
Income balance	-3,714	-3,644	70
Current transfers credits	644	644	0
Current transfers debits	328	328	0
Current transfers balance	315	315	0
Capital account credits	192	192	0
Capital account debits	433	433	0
Capital account balance	-241	-241	0