UPDATE: New Zealand's Current Account Deficit Enters 5% Watch Zone

--Current account deficit totals NZ$10.5 billion in 12 months to Dec. 31, largest since March 2009

--New Zealand current account deficit set to widen over 2013

(Recasts the first paragraph, adds comments from economists and background throughout.)

By Lucy Craymer

WELLINGTON--New Zealand's current account deficit hit 5% of gross domestic product in 2012 and could well increase to 6% by the end of this year, economists say, something that will likely raise flags for ratings agencies and investors.

Statistics New Zealand said Wednesday that the current account deficit totaled 10.5 billion New Zealand dollars (US$ 8.6 billion) in the 12 months to the end of December, the largest since March 2009 and equivalent to 5.0% of gross domestic product. The third-quarter deficit was revised to NZ$9.86 billion, or 4.7% of GDP.

The current account "might just start to become psychologically more important" now that it is sitting at 5%, BNZ economist Doug Steel said in a note. "More importantly we see today's outcome as part of the bigger slippery slope that we think the external accounts are on."

Both BNZ and Deutsche Bank are forecasting the current account deficit to reach 6% by the year end, and economists across the board are expecting a further widening from fourth-quarter levels. Meanwhile, the Reserve Bank of New Zealand last week forecast a rise to 5.2% of GDP in the first quarter of 2014, while the Treasury, in its half-yearly forecast in December, put the deficit at 4.6% of GDP in the same period.

"The extent to which it widens will depend in part on the eventual impact of the drought on farm sector production and prices," Deutsche Bank economist Darren Gibbs said.

New Zealand's widening annual current account deficit has been forced into the spotlight by opposition political parties concerned that the country is spending a lot more abroad than it is taking in, and that its current account balance is one of the worst in the OECD.

Russel Norman, co-leader of the Green Party, the third largest in parliament, said New Zealand was on a dangerous path of "unsustainable debt" and this could lead to a Greek-style collapse.

However, economists attribute much of the widening in the deficit to the impact of the strong New Zealand dollar, and point out that New Zealand has been able to maintain a current account deficit averaging 4.5% to 5% of gross domestic product for several decades without it impacting the country's access to funding.

"With attractive yields on NZD assets, offshore investors are content to fund this deficit," Annette Beacher, head of Asia-Pacific research at TD Securities, said.

Wednesday's data also showed New Zealand's international debt position has continued to worsen. Statistics New Zealand said the country's external debt--which includes both the private sector and the government and is a key focus for international ratings agencies--totaled NZ$143.03 billion as of Dec. 31, up from a revised NZ$140.45 billion as of Sept. 30.

"Historically, current account deficits in excess of the 5% level have attracted increased attention from rating agencies, with NZ's external sector vulnerability underlined by relatively high levels of net indebtedness," First NZ Capital's head of research, Chris Green, said.

Write to Lucy Craymer at lucy.craymer@wsj.com

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