A rapidly worsening current account deficit, heading above 8 per cent of GDP by the end of next year, will be a "direct threat" to the New Zealand dollar and put the country's credit rating at risk, Bank of New Zealand economists say.
Figures out yesterday showed the annual current account deficit has widened to a worse-than- expected 4.8 per cent of GDP in the March quarter from 4.2 per cent in December.
Economists expect it will keep getting worse, with sharply falling export prices and rising demand for imports, especially as the Christchurch rebuild gains steam.
The annual deficit is moving close to the "danger zone" of 5 per cent of GDP, where it may come on to the radar screen for international investors and credit rating agencies.
BNZ said it expected to see the New Zealand dollar drift lower in the medium term, but, given its expectations of a worsening current account deficit, the risk for the currency was "significantly" on the downside.
The kiwi traded at US79.46c late yesterday, down from US79.75c in the morning.
Labour finance spokesman David Parker said the deficit had moved to almost 5 per cent of GDP even in slow economic times and there was an urgent need to increase savings and grow exports.
Green Party co-leader Russel Norman said the latest current account figures showed New Zealand sent $9.7 billion more overseas in profits, interest on debt and payments for imports than it got back in export receipts and returns on investments abroad.
BNZ said the worsening deficit and the risk to our credit rating meant the Government must remain "hell-bent" on getting back to a Budget surplus, so the rating agencies did not have the excuse of "twin deficits" to downgrade New Zealand's sovereign debt.
Bank economists point out that though the deficit was expected to worsen, the economy remained sound.
Economic growth figures due out today are expected to show expansion of between 0.4 per cent and 0.6 per cent for the March quarter, with the potential for better numbers in the June quarter. That is in sharp contrast to many other countries where economies are stalling or going backwards.
BNZ expected the deficit to climb to 7 per cent of GDP by the end of this year and peak at 8.3 per cent of GDP by the end of 2013.
BNZ senior economist Craig Ebert said some rated agencies were unhappy with the current account outlook.
A credit rating downgrade might be just a matter of time, or "they may cut us some slack ... but it is certainly a risk".
ASB expected the deficit to peak above 6.5 per cent of GDP around the middle of next year, but later on a recovery in commodity prices should help constrain the deficit.
March quarter current accountDeficit: $2.8 billion, seasonally adjusted ($2.2b in December quarter)
Deficit: $1.3b, unadjusted ($2.8b in December quarter)
The deficit is getting worse because:
Commodity prices have fallen sharply, especially dairy products, despite strong production
Crude oil sales down from the Tui oilfields
Goods imports rose, especially because of rising oil prices
Spending by foreign tourists in New Zealand fell in the quarter, as visitor numbers fell after the Rugby World Cup last year
Profits by foreign-owned companies in New Zealand fell
March year-end deficit rose to $9.7b or 4.8 per cent of GDP.