Balance of Payments and International Investment Position: December 2009 quarter

Overview

Quarterly
The seasonally adjusted current account balance was a deficit of $3,110 million this quarter, a turnaround from the September 2009 quarter surplus of $39 million. The surplus in the previous quarter was the first since the December 1988 quarter. The $3,149 million change in the current account balance in the latest quarter was due to: 

• $2,656 million increase in the investment income deficit (this series is not seasonally adjusted)
• $405 million decrease in the balance on goods surplus 
• $55 million fall in the balance on transfers surplus, and 
• $33 million decline in the services balance.

The increase in the investment income deficit was the largest quarterly increase since the time series began, and follows five consecutive decreases. Unusually large tax charges recognised in the June and September 2009 quarters contributed to lower than usual income from foreign direct investment in New Zealand during those periods. In the December 2009 quarter, some of this tax has been reversed, contributing to a rise in profits earned by foreign owned banks. Setting aside the effects of the unusual tax transactions, profits earned by foreign investors from their New Zealand bank and corporate subsidiaries rose in the December 2009 quarter.

The seasonally adjusted balance on goods was a surplus of $237 million in the December 2009 quarter, down $405 million from the surplus in the previous quarter. Exports of goods fell $255 million, due to lower volumes of dairy products and crude oil. Imports of goods increased $150 million this quarter, despite price falls for all categories.

 

The December 2009 quarter financial account recorded a $1,023 million net inflow of financial capital. A $6,450 million inflow of foreign investment in New Zealand featured banks issuing debt securities overseas as well as receiving deposits from abroad. New Zealand investment overseas was an outflow of $5,427 million this quarter. The official sector increased investment in foreign currency reserve assets, while banks increased their overseas loans and deposits.

The net inflow of investment measured in the financial account this quarter does not fully account for the current account deficit, resulting in a net errors and omissions (residual) of $2,596 million. The residual reflects known areas of undercoverage in the Balance of Payments accounts, such as the measurement of transactions in financial derivatives. However, levels of financial derivative assets and liabilities are measured, and are presented in Table 2 of this release. Please see the 'Technical notes' to this release for more details.

New Zealand's net debtor position (liabilities exceeding assets) at 31 December 2009 was $167.5 billion (90.3 percent of GDP), $5.3 billion smaller than at 30 September 2009. This was the largest fall in the net debtor position since the series began in June 2000 and was mainly driven by valuation changes to assets and liabilities. Part of this activity was due to banks resetting their financial derivative contracts during the quarter.  

Annual
For the year ended December 2009, the current account deficit was $5.5 billion (2.9 percent of GDP). This compares with a current account deficit of $5.9 billion (3.2 percent of GDP) for the year ended September 2009, and $16.0 billion (8.7 percent of GDP) for the year ended December 2008. 

Tax transactions in the banking sector in the June and September 2009 quarters reduced the current account deficit. A partial reversal of charges occurred in the December 2009 quarter. The combined tax transactions were worth $1.6 billion. Without these effects, the current account deficit would have been $7.1 billion (3.8 percent of GDP) in the December 2009 year and $7.9 billion (4.3 percent of GDP) in the September 2009 year.

The $0.4 billion decrease in the current account deficit from the year ended September 2009 was mainly due to a decrease in the balance on services deficit. Imports of transportation services was the main driver, with lower expenditure on sea freight during the latest period. Imports of goods also fell by more than exports of goods. This was partly offset by an increase in the investment income deficit, driven by a fall in income earned from New Zealand investment abroad.

The financial account showed a net inflow of $6.9 billion for the year ended December 2009, compared with a net inflow of $6.7 billion for the year ended December 2008. However, the inflow in the latest year was due to New Zealand increasing overseas liabilities, whereas during the December 2008 year the inflow resulted from a withdrawal of assets from abroad. 

During the year ended December 2009, the inflow of foreign investment to New Zealand was $18.9 billion. These inflows were mainly due to New Zealand banks raising money in the form of debt securities, as well as raising loans from overseas. In contrast, during the December 2008 year, there was a $3.0 billion withdrawal of foreign investment from New Zealand. The main feature was banks reducing their debt security liabilities to overseas.

Flows of New Zealand investment abroad were $11.9 billion during the year ended December 2009. In comparison, the year ended December 2008 featured a $9.7 billion withdrawal of investment from abroad. Increased investment in foreign currency reserve assets by the official sector in the latest year (after divesting these in the year ended December 2008) was behind the movement between these two periods.

Trend

The current account balance trend series was a deficit of $2.1 billion in the December 2009 quarter, a sharp adjustment from a deficit of $0.7 billion two quarters ago. This movement in the trend is mostly due to the income and transfers deficit trend series, which has widened $0.9 billion since the June 2009 quarter.

The current account balance trend series is now at a similar level to what it was six years ago. Since then, it has mostly hovered between a deficit of $3 billion to $4 billion, before significantly narrowing in the March 2009 quarter due to improvements in both the goods and services, and the income and transfers trend balances.

An increase in the trend estimate of investment income earned by foreign investors in New Zealand drove the movement in the income and transfers trend balance deficit over the past two quarters. The goods and services balance trend remains in surplus, due to a falling goods imports trend. In the latest quarter the lower surplus was due to a fall in the goods exports trend. 

 

Goods

All references are to seasonally adjusted numbers unless otherwise stated.

The goods balance was a surplus of $237 million in the December 2009 quarter, down $405 million from the September 2009 quarter surplus. This is now the fifth consecutive surplus on the goods balance, but the surplus has been getting smaller since peaking in the March 2009 quarter. Exports of goods decreased $255 million this quarter, while imports of goods increased $150 million.

 

The decrease in the value of exports in the December 2009 quarter was mainly due to falls in volumes of dairy products and crude oil. Exports of dairy products are at their lowest value since the September 2007 quarter, due to falling prices over this time. Partly offsetting these decreases was an increase in the value of meat exports this quarter, due to higher volumes.

Increases in the values of passenger motor car imports, and petroleum and petroleum products were behind the increase in imports of goods this quarter. Overall, import prices were 5.8 percent lower in the December 2009 quarter compared with the previous quarter.

Balance of Payments (BoP) makes conceptual adjustments to capture all changes in ownership of goods, regardless of whether items cross the customs frontier. Examples include changes in oil stocks held abroad by New Zealand residents, and the removal of large value capital goods that enter New Zealand under an operational lease. Refer to the 'Technical notes' of this release for further information.

In the December 2009 quarter overseas merchandise trade imports (as reported in the Overseas Merchandise Trade: December 2009 quarter release) moved in the opposite direction to BoP imports figures. The difference in the movements between import values for BoP and overseas trade was due to conceptual adjustments made to overseas trade values. BoP conceptual adjustments removed $653 million from the value of overseas trade imports for the December 2009 quarter, compared with $978 million removed for the previous quarter.

For the year ended December 2009, the actual goods balance was a surplus of $2,561 million, a turnaround of $4,943 million from the deficit for the year ended December 2008. This was mainly due to a $8,487 million fall in imports of goods. Imports of petroleum and petroleum products, and vehicles, parts and accessories were the main drivers behind this fall. Import volumes of all broad economic categories fell from the December 2008 year to the December 2009 year. Exports of goods decreased $3,544 million over this time, mainly due to falls in world prices for dairy products and crude oil.

Services

All references are to seasonally adjusted figures unless otherwise stated.

The balance on services was a deficit of $17 million in the December 2009 quarter, compared with a $16 million surplus in the September 2009 quarter. A fall in exports of services was behind the turnaround in the balance this quarter. The balance on services was a deficit of $409 million a year ago.

 

Exports of services fell $61 million in the December 2009 quarter, driven by lower exports of travel services. Travel services exports, which measure expenditure by foreign tourists in New Zealand, fell $62 million from the September 2009 quarter. Both the number of visitors and the number of days spent by these visitors in New Zealand increased. However, this was more than offset by tourists spending less, on average, while they were here.

Imports of services were down $27 million from the previous quarter, to $2,962 million in the December 2009 quarter. Other business services decreased $14 million during the quarter, mainly due to a fall in operational leasing payments. Imports of construction services fell for the second consecutive quarter, down $12 million. These categories are not seasonally adjusted.

The year ended December 2009 balance on services was a deficit of $257 million, compared with a deficit of $640 million in the year ended September 2009. The services deficit has been narrowing since the year ended March 2009 when it peaked at $1,118 million.

The narrowing in the services deficit since the year ended March 2009 has been driven by falling imports of transportation and travel services. Imports of transportation services fell $923 million over this time, due to lower freight payments on imports of goods. The price of sea freight also fell over this time.

Also contributing to the smaller year ended services deficit was a drop in expenditure by New Zealanders travelling overseas. Departure numbers have remained relatively stable, but people have been taking shorter holidays and spending less while abroad. 

Investment income

The investment income deficit for the December 2009 quarter was $3,399 million, an increase of $2,656 million from the previous quarter. This is the largest increase in the deficit since the time series began in March 1987 and follows five consecutive quarterly decreases, in which the deficit fell by a combined $2,865 million. Income earned from foreign investment in New Zealand increased by $2,456 million, while income earned from New Zealand investment abroad was down $200 million.

     

In the December 2009 quarter, income from foreign investment in New Zealand was $3,844 million, an increase of $2,456 million from the September 2009 quarter. The increase was driven entirely by profits earned by foreign direct investors from their New Zealand subsidiaries.

• Foreign direct investors earned a $2,287 million profit from their New Zealand subsidiaries of which $1,458 million was reinvested as capital.
• Reinvested earnings are at their highest level since the time series began.
• Interest paid on debt securities held by non-residents was up; however, this was offset by a fall in interest paid on foreign other investment in New Zealand (mainly loans and deposits).

The increase in profits earned by foreign direct investors has been affected by unusually large tax transactions in the June, September, and December 2009 quarters. This tax was related to structured finance deals in the banking sector and has been recognised in the companies' financial accounts and within our published statistics. The tax transactions were $661 million in the June 2009 quarter and $1,366 million in the September 2009 quarter. The tax significantly reduced the after-tax profits earned by foreign direct investors in these quarters.

On 23 December 2009, a tax settlement was announced between the Commissioner of Inland Revenue and the affected banks. As a result of the settlement, an identified $379 million of the tax charged in previous quarters was reversed and recognised within the December 2009 quarter. This reversal increased the profits earned by foreign direct investors from their New Zealand subsidiaries, exaggerating the rise in income from foreign investment in New Zealand for the December 2009 quarter.

In the December 2009 quarter, income from New Zealand investment abroad was $445 million, a decrease of $200 million from the September 2009 quarter.

• Profits earned by New Zealand direct investors on their overseas subsidiaries fell by $126 million.
• Dividend income received by New Zealand fund managers on overseas portfolios also fell.
• Interest earned by residents on other investment abroad was down $31 million, the ninth consecutive quarterly decrease.  

The investment income deficit for the year ended December 2009 was $8,289 million, a decrease of $5,432 million from the year ended December 2008. Income from foreign investment in New Zealand fell by $6,266 million. Of this fall, 53.4 percent was due to lower profits earned by foreign direct investors and dividends paid to foreign portfolio investors, while 46.6 percent was due to less interest paid on foreign borrowing. During the same period, income from New Zealand investment abroad fell by $835 million.  

Current transfers

Current transfers are offsetting entries to transactions where goods and 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 $69 million for the December 2009 quarter, a decrease of $32 million from the September 2009 quarter.

Current transfers into New Zealand were $394 million in the December 2009 quarter, $67 million lower than in the September 2009 quarter. This fall was due to a decrease in non-resident withholding tax (NRWT) received. NRWT is payable by foreign investors on their withholding income, such as interest and dividends received from their investments in New Zealand.

Dividend payments increased in the December 2009 quarter after falling in the June and September quarters. There is often a lag in the relationship between dividends and NRWT, as the tax on dividends is not due until a month after a dividend is paid.

Current transfers out of New Zealand were $324 million this quarter, a decrease of $36 million from the September 2009 quarter. This decrease was mainly due to a fall in international aid payments.  

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. In the December 2009 quarter, the capital account balance was a deficit of $45 million, a decrease of $49 million from the September 2009 quarter deficit, and the smallest capital account deficit since the March 2005 quarter.

Inflows of capital transfers rose by $44 million from the September 2009 quarter to $290 million in the December 2009 quarter. This was mainly due to investment transfers which increased $26 million over this time.

Capital transfers out of New Zealand were $336 million in the December quarter, and have remained relatively stable for the last three quarters. More people emigrated to Australia from New Zealand this quarter, but this was more than offset by a fall in the number of people moving to the rest of the world.

Compared with the December 2008 quarter, capital transfers out of New Zealand have fallen by $72 million. Net migration (arrivals minus departures) was 2,666 people a year ago, and 6,876 people in the December 2009 quarter. This increase in net migration is due to a fall in the number of long-term departures, as migrant arrival numbers remained steady. As a result the capital transfers deficit has narrowed by $87 million over this time.

Financial account and International Investment Position (IIP)

Financial account (flows)

A $1.0 billion net capital inflow into New Zealand was recorded in the December 2009 quarter. This was the result of $6.5 billion of foreign investment into New Zealand, which was partly offset by $5.4 billion of New Zealand investment overseas.

The $6.5 billion flow of foreign investment into New Zealand in the December 2009 quarter was spread across all investment categories.

• The largest inflow was $4.7 billion of foreign portfolio investment. This inflow was primarily driven by New Zealand banks issuing debt securities abroad, mainly in short-term money market instruments.
• Foreign other investment contributed a net $1.1 billion inflow, which featured the banking sector raising deposit liabilities, partly offset by reduced loans from overseas.
• Foreign direct investment into New Zealand was $0.7 billion in the December 2009 quarter.

The $5.4 billion of New Zealand investment abroad in the December 2009 quarter featured significant outflows of other investment ($3.9 billion), reserve assets ($2.1 billion), and portfolio investment ($2.0 billion). This was partly offset set by a $2.5 billion withdrawal of New Zealand direct investment from abroad.

• The $3.9 billion of New Zealand other investment abroad was mainly the result of New Zealand banks investing abroad in the form of loans and deposits.
• Transactions increasing reserve assets by $2.1 billion were mainly driven by investment in foreign currency instruments by the official sector. 
• Portfolio investment abroad of $2.0 billion was mainly driven by fund managers investing in shares in overseas companies and purchasing debt securities issued by foreign companies. 
• Withdrawal of New Zealand direct investment abroad was primarily the result of New Zealand direct investors reducing net lending to their overseas subsidiaries. 

Reconciling the December 2009 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 2009 to the position at 31 December 2009 (Table 2). The IIP is defined in the 'Technical notes' of this publication along with the associated term net debtor position. 

 

As at 31 December 2009, New Zealand's net international debtor position decreased by $5,328 million (3.1 percent) from the 30 September 2009 net debtor position. Changes in the valuation of financial assets and liabilities decreased the net international liability position by $6,352 million in the December 2009 quarter, partly offset by net financial account transactions of $1,023 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 valuation changes arising from changes in accounting policy (for example, contingent liabilities) and accounting treatments (for example, writeoffs and writedowns).

• Changes in the value of financial derivative contracts. Asset positions fell by $3,853 million, and liability positions fell $7,404 million from 30 September 2009 to 31 December 2009. The overall impact was to reduce the net IIP debtor position by $3,551 million. Causes of the falls reported by survey respondents included resetting of contracts during the quarter.
• Market price and other valuation changes. Market values in the overseas share markets in which New Zealand funds are principally invested were between 2 and 8 percent higher at 31 December 2009 compared with 30 September 2009. Combined with other valuation changes, the overall effect was a reduction in the net debtor position by $2,691 million in December 2009 quarter.
• Exchange rate changes reduced the net debtor position by $110 million in the December 2009 quarter. The New Zealand dollar (NZD) appreciated against most of the currencies in which New Zealand's foreign assets and liabilities are primarily held. An appreciation of the NZD reduces the NZD value of foreign currency assets and liabilities.

 

International Investment Position (stocks)

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

At 31 December 2009, New Zealand's net international debtor position was $167.5 billion (90.3 percent of GDP) and comprised $140.3 billion of international assets and $307.8 billion of international liabilities.

The 31 December 2009 net debtor position was $5.3 billion smaller than the 30 September 2009 position of $172.8 billion, and $5.2 billion larger than the 31 December 2008 position of $162.3 billion.

 

The fall in New Zealand's net international debtor position at 31 December 2009 compared with 30 September 2009 was the most significant decrease of the net debtor position since the time series began in June 2000. It was primarily driven by a $5.2 billion fall in net international debt. The net international equity debtor position remained relatively steady at $11.0 billion.

The drivers of the decrease in the net debt position were falls in net debt by the banking sector of $1.6 billion and the 'other' sector (mainly private sector corporations) of $1.4 billion, reinforced by a rise in official sector net lending (assets) of $2.2 billion. The increase in official sector net lending abroad was driven by a rise in reserve assets, and a fall in the level of New Zealand government bonds held by non-residents.

Overall, a key factor in the fall in the level of net international debt was changes in the value of financial derivative asset and liability positions. Excluding the value of financial derivative asset and liability positions from the International Debt series produces the external debt series (refer to the 'Technical notes' to this release for a more detailed description). At 31 December 2009, New Zealand net external debt of $154.9 billion was $1.7 billion lower than the level at 30 September 2009, and $1.1 billion lower than the $156.0 billion level at 31 December 2008.

 

Overseas debt with a time to maturity of one year or less was 44.4 percent of the total at 31 December 2009, a small increase compared with 41.9 percent at 30 September 2009. In general, overseas debt with a time to maturity of one year or less as a proportion of total overseas debt has been generally falling from 30 June 2008 to 30 September 2009. 

   

Next release ... 

Balance of Payments and International Investment Position: March 2010 quarter will be released on 23 June 2010.

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

Revisions

The tables below present a summary of revisions to the September 2009 quarter BoP and IIP major components, as a result of new or improved data.