New Zealand: CAD fell to just 3.1% of GDP

New Zealand: CAD fell to just 3.1% of GDP thanks to company tax transactions

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New Zealand’s current account balance deteriorated in 3Q, falling to a deficit of NZ$1.4 billion (J.P. Morgan -NZ$1.6 billion, consensus -NZ$2.0 billion) from a surplus of NZ$367 million in 2Q.

Preventing further deterioration of the current account, however, were a string of large company tax transactions, similar to that recorded in the June quarter when the Bank of New Zealand (BNZ) reported a NZ$661 million provision for tax on structured finance transactions that were entered between 2000 and 2005, which resulted in a sharp drop in income on foreign equity investment. Similar adjustments were recorded in 3Q, with Westpac making a provision for NZ$918 million, ASB making a provision for NZ$208 million, and ANZ making a provision for NZ$240 million. As a result of the NZ$1.366 billion of company tax transactions in the banking sector recorded in the September quarter, the investment income balance was a deficit of NZ$574 million. Interest paid overseas also fell.
In the year to September, the current account deficit was NZ$5.7 billion, or just 3.1% of GDP (J.P. Morgan -3.4%, consensus -3.5%), marking the smallest percentage since 1Q02. As highlighted by Statistics New Zealand, there was over NZ$2 billion in company tax transactions affecting income from foreign investment in New Zealand during the year ending September. The CAD would have been NZ$7.8 billion, or 4.2% of GDP, in the year to September in the absence of the tax transactions.

The trade balance worsened in 3Q as expected, primarily owing to weaker exports. Seasonally adjusted data showed that the trade surplus was NZ$734 million in 3Q, down NZ$ $55 million from the previous quarter. Exports fell NZ$665 million and imports fell by a smaller NZ$609 million.

We suspect that New Zealand’s current account deficit will worsen in 2010. Our forecast is for a current account deficit of 6.8% of GDP, owing mainly to stronger imports as domestic demand continues to recovery and the absence of further company tax transactions.

ENDS

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