Balance of Payments and International Investment Position: December 2008 quarter

Overview

The seasonally adjusted current account deficit was $3,772 million in the December 2008 quarter, $236 million smaller than the September 2008 quarter deficit of $4,008 million. The narrowing of the deficit in the latest quarter was mostly due to an increase in exports of goods, partly offset by an increase in imports of services.

The seasonally adjusted balance on goods was a deficit of $177 million in the December 2008 quarter. Exports of goods increased $507 million this quarter, while imports of goods decreased $121 million.

The investment income deficit, which is not seasonally adjusted, was $3,199 million in the December 2008 quarter, $58 million smaller than in the September 2008 quarter. The decrease in the deficit was driven by a fall in income earned by foreign direct investors from their shareholdings in New Zealand companies. This was partly offset by a fall in income from New Zealand's portfolio investment abroad.

For the year ended December 2008, the current account deficit was $16,073 million (8.9 percent of GDP), compared with $15,528 million (8.6 percent of GDP) for the year ended September 2008, and $14,372 million (8.2 percent of GDP) for the year ended December 2007. The increase in the current account deficit from the year ended December 2007 was mostly due to the balance on services, which has gone from a surplus of $288 million to a deficit of $1,014 million. Over the same period, the investment income deficit increased by $746 million, while the goods deficit remained relatively stable.

The $1,302 million change in the balance on services between the year ended December 2007 and the year ended December 2008 was caused by a $1,170 million increase in imports of services. This was mainly due to a rise in imports of transportation services. There was also a fall in exports of travel services. The $746 million increase in the investment income deficit was driven by a fall in earnings from New Zealand's investments abroad.

 

The December 2008 quarter financial account recorded a net outflow of financial capital of $2.5 billion. This measured net outflow of capital is inconsistent with the $4.0 billion current account deficit, which requires financing by a net inflow of capital. The result of the inconsistency is a net errors and omissions (residual) of $6.7 billion, meaning that the December 2008 quarter financial account does not explain the financing of the current account deficit. Therefore, the December 2008 quarter financial account must be viewed with caution. The residual and its causes are discussed in more detail in the financial account commentary below, and in the technical notes of this release.

The 31 December 2008 net debtor position (that is, liabilities exceeding assets) was $167.7 billion. This is $2.5 billion (1.5 percent) larger than the 30 September 2008 position, and $15.1 billion (9.9 percent) larger than the 31 December 2007 position. Measured financial account transactions reduced net international liabilities by $2.5 billion in the December 2008 quarter, but exchange rate, market price, and other valuation changes between 30 September and 31 December 2008 offset this by $5.0 billion.

Growth in net international debt continues to drive the increase in New Zealand's net international debtor position. At 31 December 2008, net international debt of $156.3 billion was 14.0 percent higher than at 31 December 2007. Over the same period, the net equity liability position fell 26.1 percent, to $11.4 billion.

Trend

The current account balance trend shows a smaller deficit compared with the September 2008 quarter. This is due to smaller deficits for both the income and transfers trend and the goods and services trend. Income from foreign investment in New Zealand has been showing a decreasing trend since the December 2007 quarter, and this is the main reason behind the smaller income and transfers deficit. The increasing goods exports trend was behind the declining goods and services deficit in the latest quarter.

Since the September 2005 quarter, the current account balance trend has remained a deficit within a range of between $3.3 billion and $4.0 billion. During this time, the movements in the current account balance trend were mostly caused by movements in the goods and services balance trend. From the March 2008 quarter, the income and current transfers deficit trend has been reducing. 

 

Goods

All references are to seasonally adjusted figures unless otherwise stated.

The goods balance was a deficit of $177 million in the December 2008 quarter, $628 million smaller than the September 2008 quarter deficit. Exports of goods increased $507 million in the latest quarter, while imports of goods decreased $121 million.

According to the Reserve Bank, the New Zealand dollar fell 11.8 percent against the Trade Weighted Index (TWI) during the December 2008 quarter. When expressed in New Zealand dollar terms, this depreciation increased prices for both imports and exports of goods.

The increase in export values for the December 2008 quarter was mainly due to a rise in the value of dairy products. Prices for dairy products increased 5.8 percent and volumes also increased. An increase in the value of forestry products was the other main driver behind rising export values, due to an 11.2 percent increase in prices. Partly offsetting the general increase in export prices were prices for petroleum and petroleum products exports, which fell 31.6 percent in the December 2008 quarter – the largest quarterly fall since the June 1986 quarter. Total merchandise export volumes fell 1.8 percent during the December 2008 quarter.

A fall in volumes of imported goods in the latest quarter more than offset a 3.4 percent increase in import prices. The main driver of the increase was lower volumes of passenger motor cars. Partly offsetting the general increase in prices for goods imports was a 22.4 percent fall in the price of petroleum and petroleum products – the first fall since the March 2007 quarter.

Balance of Payments (BoP) conceptual adjustments removed $1,365 million from the value of overseas trade imports for the December 2008 quarter, compared with $870 million for the September 2008 quarter. This meant that while overseas trade imports data increased (in actual dollar terms), the value of imports, as measured by BoP, decreased this quarter. Conceptual adjustments are made to exports and imports, and include such items as changes in oil stocks held abroad by New Zealand residents, and goods that cross New Zealand’s customs frontier without a change in ownership occurring. Refer to the technical notes of this release for further information.

 

The actual goods balance for the year ended December 2008 was a deficit of $2,360 million. This is $21 million smaller than the deficit for the year ended December 2007. Exports of goods increased $6.8 billion, with higher values of dairy exports (prices of which increased 35.7 percent over the year to December 2008) and increased exports of petroleum and petroleum products driving this rise. Imports of goods were also up $6.8 billion, mainly due to higher prices for petroleum and petroleum products during the December 2008 year.

Services

All references are to seasonally adjusted figures unless otherwise stated.

The services balance was a deficit of $511 million in the December 2008 quarter, an increase of $243 million from the September 2008 quarter deficit. This increase was driven by a rise in imports of $163 million in the December 2008 quarter, while the services exports decreased by $80 million. This is the third consecutive quarter in which the balance on services has declined.

The fall of $80 million in services exports was caused by a decrease in travel services exports, due to falls in the number of overseas visitors coming to New Zealand and the total number of days spent in New Zealand. There was an increase in average expenditure per person from the September 2008 quarter. However, spending per person in the latest quarter remained significantly lower compared with the December 2007 quarter.

 

The increase in imports of services was mainly due to a $60 million increase in transportation services imports. This reflects rising sea freight prices in the December 2008 quarter (as recorded in the Overseas Trade Indexes (Prices): December 2008 quarter (provisional)), which was partly caused by the depreciating New Zealand dollar. Travel services imports increased by $11 million due to a higher number of New Zealanders travelling to Australia.

Of the other services categories, which are not seasonally adjusted, communication and other business services exports increased by $17 million and $39 million, respectively. The increase in other business services was caused by increases in management fees and legal services. Imports of other business services were up $49 million, driven by increases in trade commissions and management fees. Exports and imports of personal, cultural and recreational services increased due to sales of films and costs incurred in film production.

The year ended December 2008 balance on services was a deficit of $1,014 million, compared with a surplus of $288 million for the year ended December 2007. This decline was driven by increasing imports of services, particularly transportation services and services relating to oil production and exploration. In addition, exports of travel services have decreased, reflecting lower visitor arrivals to New Zealand.

Investment income

The December 2008 quarter investment income deficit of $3,199 million is $58 million smaller than the September 2008 quarter deficit. Foreign direct investors' earnings from their shareholdings in New Zealand were $267 million lower in the December 2008 quarter than in the September 2008 quarter. This was offset by a $176 million fall in New Zealand investors' income from portfolio investment abroad.

Investment income from abroad has fallen by $102 million to $668 million for the December 2008 quarter, after being relatively stable for the previous three quarters. The fall in income on New Zealand's portfolio investments abroad was driven by lower dividends on managed funds and interest earned on official sector reserve assets. This fall was partly offset by a rise in investment income from overseas subsidiaries of New Zealand direct investors.

Foreign investors' earnings from their investments in New Zealand were $3,867 million in the December 2008 quarter, down $160 million from the September 2008 quarter. The key feature was a fall in income earned by foreign direct investors from their equity investments in New Zealand companies. This was partly offset by a rise of $183 million to $374 million in dividends paid to foreign investors holding portfolio equity securities. The December quarters regularly see the highest dividend payments on foreign investment in portfolio equity securities.

December 2008 quarter profits earned by foreign direct investors from their shareholdings in New Zealand companies were $1,375 million. Profits earned by foreign direct investors in the banking sector rose by $234 million for the December 2008 quarter, while profits earned by foreign direct investors in the 'other' sector fell by $501 million. Dividends to foreign direct investors were $498 million for the December 2008 quarter, $1,023 million smaller than for the September 2008 quarter and significantly lower than dividends in previous quarters back to March 2007. Reinvested earnings were $877 million for the December 2008 quarter, a rise of $756 million from the September 2008 quarter. Foreign direct investors' have chosen to reduce their dividends and reinvest a greater proportion of their income in their enterprises this quarter.

The year ended investment income deficit has decreased for a second consecutive quarter. In the year ended December 2008, the $13.6 billion deficit is $89 million smaller than the deficit in the year ended September 2008. However, the year ended December 2008 deficit is $746 million higher than the deficit in the year ended December 2007. The fall in the deficit from the year ended September 2008 was driven by reduced income from foreign direct investors' shareholdings in New Zealand companies and portfolio investment in New Zealand. This was partly offset by a fall in New Zealand investors' income from direct investment in overseas subsidiaries and portfolio investment abroad.

The growth in the deficit from the December 2007 year was driven by an $825 million fall in earnings from New Zealand investment abroad. This was mainly due to reduced earnings from direct investment abroad.

Income from foreign investment in New Zealand for the year ended December 2008 was relatively unchanged from the year ended December 2007. This was due to a fall in the earnings of foreign direct investors being almost offset by a rise in income from portfolio and other investment in New Zealand. The proportion of profits distributed as dividends rather than being reinvested in New Zealand was 90.5 percent in the year ended December 2008, compared with 71.7 percent in the year ended December 2007.

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 $123 million in the December 2008 quarter, a decrease of $175 million from the September 2008 quarter.

Current transfers into New Zealand were $514 million in the December 2008 quarter, down from $724 million in the September 2008 quarter. The decrease was mainly due to a fall 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 decrease in NRWT received this quarter is consistent with a fall in dividend payments to foreign investors.

Current transfers out of New Zealand were $391 million in the December 2008 quarter, a decrease of $35 million from the September 2008 quarter. This decrease was due to a fall in all expenditure, including government expenditure on subscriptions and official international aid.

For the year ended December 2008, the balance on current transfers was a surplus of $883 million, an increase of $326 million from the year ended December 2007. Current transfers into New Zealand were $2,368 million, up $442 million, mainly due to tax received on the large dividend payments to foreign investors recorded throughout 2008.

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 $167 million in the December 2008 quarter, a $30 million narrowing from the September 2008 quarter deficit of $197 million.

Inflows of capital transfers rose $43 million in the December 2008 quarter compared with the September 2008 quarter, mainly due to an increase in funds brought by migrant families into New Zealand. Outflows of capital transfers rose $13 million this quarter, caused by a rise in funds taken by migrants to Australia.

Financial account and international investment position

Financial account (flows)

In the December 2008 quarter, measured financial account transactions showed a $7.1 billion divestment of New Zealand assets from abroad, and a $9.6 billion divestment of foreign investment from New Zealand. This resulted in a net $2.5 billion outflow of financial capital, reducing net liabilities.

The main feature of the withdrawal of New Zealand investment from abroad was divestment by the official sector ((Reserve Bank of New Zealand (RBNZ) and the New Zealand Treasury)) of $4.9 billion of reserve assets. This was mostly due to the unwinding of short-term reserve asset positions. In addition to this, banks and fund managers reduced their holdings of overseas issued debt securities and fund managers sold shares in overseas companies. 
The withdrawal of foreign investment from New Zealand in the December 2008 quarter was driven by banking sector transactions reducing overseas debt security liabilities. These transactions were in part linked to the RBNZ's reduction in reserve assets. In the past months, the RBNZ introduced changes to its liquidity management arrangements, such as the introduction of the Term Auction Facility (TAF). Using this facility banks can enter into security repurchase agreements with the RBNZ using approved securities (eg Residential Mortgage Backed Securities). Data published on the RBNZ website (table D3, Term Auction Facility) shows that in the December 2008 quarter, $4.5 billion was transacted in the TAF facility.

The withdrawal of foreign investment from New Zealand also featured foreign direct investors reducing their net lending to their New Zealand subsidiaries. Partly offsetting this was an inflow of foreign other investment into New Zealand, mainly loans raised by the banking sector from overseas lenders.

Balance of payments net errors and omissions (residual)

Current account deficits require a financing inflow of capital. This financing inflow can be a combination of reducing assets held abroad, increasing liabilities to abroad, and inflows through the capital account. The December 2008 quarter financial account net outflow of $2.5 billion is therefore inconsistent with the current account deficit and is the reason for the $6.7 billion residual.

The cause of the residual lies in the financial account – not the current account or capital account. As a result of this, the financial account for the December 2008 quarter must be viewed with caution.

There are known areas of under-coverage in the financial account of New Zealand's BoP and IIP statistics that contribute to a residual. These unmeasured areas are discussed further in the technical notes of this release. One such area is transactions from settling derivative contracts falling due in the quarter. This may be of particular significance in the December 2008 quarter, as there was significant volatility in asset and liability values, and exchange rates.

Further contributions to the residual can be the under- or over-estimation of transactions in the financial account. IIP balance sheet positions arise from transactions and valuation changes. Volatility in market prices and exchange rates can lead to greater difficulty in separating the impacts of valuation effects from transactions.

For further information of what net errors and omissions are, and how they occur, please refer to the technical notes of this release.

Reconciling the December 2008 quarter financial account and the international investment position (IIP)

The reconciliation table below shows both the transaction and non-transaction causes of the shift in the net IIP from the position at 30 September 2008 to the position at 31 December 2008. The term IIP is defined in the technical notes of this publication along with the associated term net debtor position.

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At 31 December 2008, the net debtor position was $167,702 million, an increase of $2,469 million (1.5 percent) from 30 September 2008. Net transactions decreased liabilities by $2,532 million, while net valuation changes added $5,001 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 December 2008 quarter were:

• Global share-price falls. The main sharemarkets in which New Zealand funds are invested fell between 10 percent and 24 percent.
• Large currency movements. Most notably the New Zealand dollar depreciated against the United States dollar and the Japanese yen.
• Changes in financial derivative contract values related to both changes in currency and market prices.

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 31 December 2008, New Zealand's net debtor position of $167.7 billion (92.9 percent of GDP) was comprised of $139.6 billion of international assets and $307.3 billion of international liabilities. The 31 December 2008 net debtor position was $2.5 billion (1.5 percent) larger than the 30 September 2008 position (92.0 percent of GDP), and $15.1 billion (9.9 percent) larger than the 31 December 2007 position (87.1 percent of GDP).

 

Growth in international debt continues to drive the increase in New Zealand's net international debtor position. Net international debt at 31 December 2008 was $156.3 billion, up $2.6 billion from 30 September 2008, and up $19.2 billion from 31 December 2007. Net international equity at 31 December 2008 was $11.4 billion.

The biggest movement for both assets and liabilities in the December 2008 quarter was in financial derivatives, which are primarily held by the banking sector. Financial derivative assets were $25,850 million at 31 December 2008, an increase of $11,493 million (80.1 percent) from 30 September 2008. Financial derivative liabilities were $24,907 million at 31 December 2008, an increase of $12,875 million (107.0 percent) from 30 September 2008.

Next release ...

Balance of Payments and International Investment Position: March 2009 quarter will be released on 25 June 2009.

For technical information contact:
Peter Roche
Wellington 04 931 4600
Email: info@stats.govt.nz

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Revisions

The tables below present a summary of revisions to the September 2008 quarter BoP and IIP major components, as a result of new or improved data. The revision to reserve assets is due to adjusted data from Treasury.

Current and Capital Accounts
Component	Previously published September 2008 quarter	Revised September 2008 quarter	Magnitude of revision
NZ$(million)
Current account balance	-5,994	-6,013	-19
Current account credits	14,605	14,595	-10
Current account debits	20,599	20,608	9
Balance on goods	-2,049	-2,046	3
Exports (FOB)	10,466	10,455	-11
Imports (FOB)	12,515	12,501	-14
Balance on services	982	-1,007	-25
Exports of services	2,658	2,646	-12
Imports of services	3,640	3,654	14
Balance on income	-3,248	-3,257	-9
Income from investment abroad	770	770	0
Income from foreign investment	4,018	4,027	9
Balance on current transfers	286	298	12
Inflow of current transfers	712	724	12
Outflow of current transfers	426	426	0
Balance on capital account	-200	-197	3
Capital account inflow	196	199	3
Capital account outflow	396	396	0