* NZ current account deficit 2.3 percent of GDP
* Improvement likely but temporary
* Deficit helped by insurance payments, exports (Adds details, graphic link, comment)
By Mantik Kusjanto
WELLINGTON, March 23 (Reuters) - New Zealand's annual current account deficit widened in the fourth quarter, but is expected to show a sharp improvement in the near term as insurance payments flow into the country to pay for rebuilding after last month's earthquake.
The deficit for the year to Dec. 31 increased to NZ$4.38 billion ($3.2 billion) from a revised deficit of NZ$4.19 billion for the year to Sept 30, equating to 2.3 percent of gross domestic product (GDP) compared with the forecast of 2.4 percent in a Reuters poll.
The current account deficit is expected to narrow and the balance may move to surplus in the short term as insurance payouts start flowing to cover the estimated NZ$10 billion ($7.4 billion) cost of the Feb 22 which devastated Christchurch, the country's second-largest city, and killed at least 166 people.
But the improvement is expected to be temporary as a pick-up in growth on the back of reconstruction bolsters imports.
"Looking at 2012, reconstructing Christchurch is going to require a lot of imports and you've got to expect the current account deficit will be out to 5 percent of GDP by the end of next year," said Deutsche Bank chief economist Darren Gibbs.
The New Zealand dollar fell to $0.7391/99 from about $0.7404/13 before the data, before steadying around $0.7394, while bank bills <0#NBB> were little changed.
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The Reserve Bank of New Zealand slashed interest rates by 50 basis points to 2.5 percent this month to restore confidence and cushion the economy after the Christchurch earthquake.
The economy stalled in the second half of 2010, contracting 0.2 percent in the third quarter from the previous quarter. Data on Thursday is expected to show scant growth of 0.1 percent in the fourth quarter, according to a Reuters poll, though some analysts believe the country slipped back into recession.
DEFICITS
New Zealand's chronic current account deficit has been a long standing concern for ratings agencies, more so recently because of the higher global sensitivity to debt.
The current account deficit in the December quarter widened to NZ$3.52 billion from a sharply revised NZ$29 million deficit in the September quarter.
Statistics NZ revised the third quarter number from NZ$1.77 billion deficit after raising its insurance payment estimate from offshore to NZ$3.6 billion from NZ$1.7 billion.
The annual balance showed an improving trade surplus, with strong commodity exports and weak imports. Export volumes rebounded from the third quarter, when drought hit agricultural exports.
However, the investment deficit -- the gap between earnings for foreign investors in New Zealand and the country's foreign investments -- remained large at NZ$10.7 billion from NZ$10.8 billion in the third quarter.
The services deficit more than doubled for the year as tourism receipts fell.
The central bank has forecast the annual current account will post a surplus of 0.2 percent of GDP by March 2011, as insurance payments for earthquake damage swell .
But the gap is seen rising to 5.1 percent of GDP by March 2014 as the economy returns to normal growth, increasing imports and investment earnings for foreigners.
"We continue to expect ratings pressure," said RBC strategist Michael Turner.
Standard & Poor's and Fitch Ratings have both cut their outlook for New Zealand's foreign-currency credit ratings to negative from stable because of concerns about the country's foreign debt mountain.
New Zealand relies heavily on foreign borrowing to fund its deficits because of perennially low levels of household saving. The government has said it wants to increase national savings.
The IMF said this week raising national saving through fiscal consolidation is key to containing the rising current account deficit.
New Zealand's net foreign liabilities fell to 81.7 percent of GDP from 83.8 percent in the previous quarter as household deposits increased and lending was subdued. By comparison Australia's level is around 60 percent. ($1=NZ$1.35) (Editing by Kim Coghill)