New Zealand’s balance of payments figures for the June 2008 quarter demonstrate once again that the country’s weak balance sheet – the difference between offshore assets and liabilities – is the main contributor to the burgeoning current account deficit.

Statistics New Zealand reported a current account deficit of $15.0 billion for the June 2008 year compared with $14.2 billion for the March 2008 year and $14.1 billion for the year ended June 2007.

The main contributor to the deficit is investment – the difference between dividends and interest paid and received – which accounted for $13.9 billion of the $15.0 billion June 2008 year deficit.

The main contributor to the deficit is investment – the difference between dividends and interest paid and received – which accounted for $13.9 billion of the $15.0 billion June 2008 year deficit.

The core problem is that we are a large debtor nation with net liabilities of $159 billion compared with $101 billion as at 31 March 2003.

Net liabilities have increased from 77.1% to 86.6% of GDP in the six years ended March 2008 (the June 2008 ratio cannot be determined until the GDP figures are released next Friday). New Zealand has one of the world’s weakest balance sheets on a GDP ratio basis.

The main problem has been the huge increase in bank borrowing, which has risen from 39.3% of total international liabilities to 48.1% since 31 March 2003. Much of this has been used to fund residential property purchases.

The other problem is that offshore companies with activities in this country are achieving a much higher return than New Zealand companies operating offshore. In the June 2008 year the former group had NZ earnings of $7.6 billion whereas our companies had offshore earnings of just $0.9 billion.

The country’s huge current account deficit is a direct consequence of our low savings rate, a heavy reliance on offshore borrowing and the inability of our major companies to expand profitably offshore.

The New Zealand Superannuation Fund, which has most of its investments offshore, and the KiwiSaver scheme should help improve the situation but these recent innovations will not have a meaningful impact on the current account for another decade or so.

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