Balance of Payments and International Investment Position: June 2008 quarter

Overview

The seasonally adjusted current account deficit was $4,623 million in the June 2008 quarter, an increase of $1,097 million from the March 2008 quarter. The larger deficit this quarter was driven by increased imports of goods, while income from foreign investment in New Zealand and imports of services also increased.

Seasonally adjusted imports of goods were up $753 million this quarter, with the main contributors being capital goods, and petroleum and petroleum products. Income from foreign investment in New Zealand was up $214 million, driven by increased income earned by foreign direct and portfolio investors on their shareholdings in New Zealand. The increase in imports of services has taken the balance on services to a deficit this quarter.

In actual dollar terms, the current account deficit was $3,911 million this quarter, compared with $3,154 million in the June 2007 quarter. This contributed to a year ended June 2008 quarter deficit of $14,967 million, up from the March 2008 year deficit of $14,211 million, and the June 2007 year deficit of $14,096 million.

The year ended June 2008 current account deficit expressed as a percentage of Gross Domestic Product (GDP) is not available at the time of this release because June 2008 quarter GDP data is not released until 25 September 2008. The current account to GDP ratios table will be released on 25 September with the Balance of Payments and International Investment Position: Year ended 31 March 2008 release. The year ended release presents additional breakdowns of New Zealand's international trade in services, country breakdowns of international investment, and industry breakdowns of international financial assets and liabilities. In addition, the year ended release contains information about hedging of New Zealand's foreign currency overseas debt.

A withdrawal of New Zealand investment from abroad (reducing assets) was the key feature of current account financing in the June 2008 quarter. This is the first time since the June 2006 quarter that the current account deficit has been financed in this way. The $5.2 billion of divestment from abroad was primarily in the form of reduced lending to abroad, and was partly offset by a $0.6 billion withdrawal of foreign investment from New Zealand. 

The net International Investment Position (IIP) showed a net debtor position (ie liabilities exceeding assets) of $159.2 billion, an increase of $5.3 billion since 31 March 2008. Transactions accounted for $4.5 billion of the change, with the remaining amount being valuation changes. Valuation changes include market price changes (for example, shares), exchange rate changes and changes in the market prices of financial derivative contracts.

Net overseas debt continues to be the driver of the rising net international debtor position, contributing 93.1 percent compared with 88.6 percent at 30 June 2007. The remainder consists of net international equity liabilities.

Trend

The deficit on the current account trend series has widened to over $4 billion this quarter. The goods and services deficit has fluctuated around the $500 million mark since turning from a surplus to a deficit in the March 2004 quarter. In that time the income and transfers deficit has steadily widened, because income from foreign investment in New Zealand has been growing faster than income from New Zealand investment abroad.

The deficit in the goods and services trend series has increased from $252 million in the March 2008 quarter to $664 million in the June 2008 quarter. This is smaller than the increase in the seasonally adjusted goods and services deficit, which has gone from $203 million to $1,206 million. The trend series removes the impact of irregular events, such as the large-value capital goods imported this quarter that related to the oil industry.

Goods

All references are to seasonally adjusted figures unless otherwise stated.

The goods balance was a deficit of $1,066 million in the June 2008 quarter, $867 million more than the March 2008 quarter deficit. The increase in the goods deficit this quarter was due to a decrease in exports of goods and a large increase in imports of goods.

The value of exports of goods was $10,577 million in the June 2008 quarter, a decrease of $115 million from the March 2008 quarter. A significant drop in dairy product export volumes was the main cause of lower export values this quarter. This is the second consecutive quarterly fall in dairy product volumes and is mainly the result of a drought earlier in the year. The price of dairy products also fell slightly (down 0.7 percent), following five consecutive quarterly increases. Partly offsetting the fall in dairy products was a rise in the value of crude oil exports. Increased international prices and a depreciated New Zealand dollar were the main reasons for this increase. 

The value of imports of goods increased $753 million in the June 2008 quarter to $11,643 million. The June 2008 quarter is the first quarter imports have exceeded $11 billion. The main contributors to the June 2008 quarter rise were capital goods and petroleum and petroleum products. Within the petroleum and petroleum products category, crude oil showed the largest increase, with a rise in prices slightly offset by a fall in volumes. Prices and volumes of automotive diesel and refined petroleum also increased significantly. Volumes of petroleum and petroleum products are often influenced by large irregular imports.

Imports of capital goods were driven by a rise in volumes this quarter, mostly from large-value capital goods related to the oil industry (see the Overseas Trade Indexes: June 2008 quarter release for further details). The value of consumption goods also increased in the June 2008 quarter, due to higher prices and volumes of household food and beverages.

Services

All references are to seasonally adjusted figures unless otherwise stated.

The services balance was a deficit of $140 million in the June 2008 quarter. This deficit is $136 million larger than the revised March 2008 quarter deficit and follows a period of surpluses beginning in the June 2001 quarter.

Exports of services were $3,214 million this quarter, an increase of $33 million from the March 2008 quarter. The increase was mainly due to an increase in exports of travel services, but was partly offset by a decrease in exports of transportation services. Exports of travel, which measures spending of visitors to New Zealand, climbed $76 million this quarter. There was a decrease in the number of visitors to New Zealand this quarter, but this was more than offset by increases in expenditure per person and average length of stay. Revenue from other business services (not seasonally adjusted) increased by $58 million, mainly due to increased earnings from merchanting, accounting and consulting services.

Imports of services were $3,353 million this quarter, an increase of $168 million from the March 2008 quarter. The other business services category, which is not seasonally adjusted, was up $207 million this quarter. This reflects an increase in spending on services related to oil exploration and production, and an increase in management fees paid by New Zealand enterprises to their foreign parent companies. Imports of transportation services were up $44 million, partly reflecting the rising cost of fuel. Imports of travel services were down $26 million – the first fall since the March 2004 quarter. This was due to falling short-term New Zealand resident departures overseas this quarter, which may be linked to the depreciating New Zealand dollar and rising living costs making overseas travel less affordable.

Investment income

The June 2008 quarter investment income deficit of $3,714 million was $232 million larger than the March 2008 deficit. Foreign investors' earnings from their investments in New Zealand were up $214 million, while New Zealand investors' earnings from abroad were down $18 million.

The rise in foreign investors' income from New Zealand this quarter was due to increased earnings by foreign direct and portfolio investors from their New Zealand investments. Foreign direct investors earned $100 million more from their New Zealand subsidiaries. This rise was caused primarily by a $74 million rise in profits earned from these subsidiaries. Of the $1,897 million in profits earned by foreign direct investors this quarter, 90.1 percent ($1,710 million) was distributed as dividends, compared with 122.0 percent (dividends distributed exceeded profits earned) in the March 2008 quarter. Additionally in the June 2008 quarter, more interest was paid to overseas parent companies, reflecting higher levels of borrowing by New Zealand subsidiaries from their overseas parent companies. Foreign portfolio investors earned $104 million more from their New Zealand investments. Dividend payments to these investors were up $117 million, but were partly offset by lower interest due to foreign holders of New Zealand-issued debt securities.

The $18 million fall in income earned from New Zealand's investments abroad this quarter is the second consecutive quarterly fall, and follows a sustained period of increases in earnings from abroad. New Zealand direct investors earned $20 million from their overseas subsidiaries, a fall of $75 million from the March 2008 quarter. There was also less interest earned from portfolio and other lending abroad, resulting from a lower level of loans to abroad by the banking sector and lower returns earned by the official sector. The fall in official sector interest earned was primarily the result of investing in more secure and liquid financial assets abroad. The falls in earnings were partly offset by a $104 million rise in dividends earned from portfolio shareholdings in overseas companies, primarily by New Zealand fund managers. 

The year ended June 2008 income deficit of $13,930 million is $1,795 million larger than the year ended June 2007 deficit. Income earned by foreign investors from their New Zealand investments rose $2,348 million to $17,503 million, while income earned from New Zealand's investment abroad rose $553 million to $3,573 million.

The increased returns to foreign investors arose from profits from direct investment in New Zealand companies and dividends from portfolio shareholdings. Combined returns on these equity investments were up $1.0 billion in the June 2008 year, compared with the June 2007 year. Over the same period, interest attributed to foreign investors from their lending to New Zealand was up $1.3 billion.

The rise in income earned from New Zealand's overseas investments in the June 2008 year was mostly due to increased interest, driven mainly by higher levels of reserve assets. There were also increases in profits earned by New Zealand direct investors from their overseas subsidiaries, and in dividends from fund managers' shareholdings in overseas companies.

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 $315 million in the June 2008 quarter, an increase of $168 million from the March 2008 quarter surplus.

Current transfers into New Zealand were $644 million in the June 2008 quarter, up from $486 million in the March 2008 quarter. This increase was mainly due to a rise in non-resident withholding tax (NRWT) received from foreign investors, which is payable on withholding income (such as dividends and interest) earned from their investments in New Zealand. The increase in NRWT this quarter is consistent with the high dividend payments to foreign investors over the past two quarters. There is often a lag between dividends declared and NRWT, as the tax is not due until the month after a dividend is paid.

Current transfers out of New Zealand were $328 million this quarter, a decrease of $11 million. This decrease was due to a fall in government expenditure on subscriptions to international organisations this quarter. Expenditure on official international aid was flat this quarter.

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 $241 million in the June 2008 quarter, $39 million wider than the March 2008 quarter deficit.

Inflows of capital transfers fell $61 million in the June 2008 quarter compared with the March 2008 quarter, mainly due to a fall in the number of migrants coming to New Zealand. Outflows of capital transfers fell $22 million this quarter, with a fall in the number of migrants moving to Australia partly offset by increased emigration to the rest of the world. 

Financial account and International Investment Position (IIP)

Financial account (flows)

In the June 2008 quarter, a $4.5 billion net inflow of capital financed New Zealand’s current account deficit. This inflow was primarily due to a $5.2 billion withdrawal of New Zealand investment abroad (reducing assets) exceeding a $0.6 billion withdrawal of foreign investment in New Zealand (reducing liabilities). This is in contrast to the March 2008 quarter, when New Zealand’s current account deficit was financed by an inflow of foreign investment into New Zealand. The last time the current account deficit was funded primarily by a decrease in New Zealand's assets abroad was the June 2006 quarter.

The net withdrawal of New Zealand investment from abroad featured a $6.9 billion withdrawal of direct and other investment (mainly loans to overseas borrowers). This was partly offset by $1.7 billion of investment abroad in portfolio and reserve assets. The disinvestment from abroad was mainly caused by overseas borrowers reducing their loans from New Zealand banks. In addition, New Zealand banks reduced their deposits abroad and New Zealand direct investors reduced their lending to their overseas subsidiaries.

The transactions decreasing foreign investment in New Zealand consisted of a $2.2 billion withdrawal of other and portfolio investment, partly offset by a $1.5 billion inflow of direct investment. The withdrawal of portfolio and other investment from New Zealand was mostly caused by New Zealand banks reducing their loans from abroad (some of which was related to the reduced lending to abroad noted above) and foreign portfolio investors selling New Zealand company shares. This withdrawal was partly offset by foreign direct investors injecting additional capital into their New Zealand subsidiaries in the form of equity, debt financing and reinvested earnings.

Reconciling the June 2008 quarter financial account and the International Investment Position