Fitch downgrades NZ economic forecast, lowers rating outlook

Wednesday 27th January 2016

Fitch Ratings has reined in its expectation for New Zealand's economic growth this year and dropped its bias for a rating upgrade for the nation as soft dairy prices look set to weigh on business activity, making it more difficult for the government to get on top of debt.

The global rating agency affirmed New Zealand's long-term foreign currency issuer default rating at AA, while reducing the outlook to stable from positive, which had previously indicated a higher rating was likely over a one- to two-year period. Fitch expects New Zealand's gross domestic product will have slowed to 2.3 percent last year, and will expand 2.4 percent in 2016, and 2.6 percent in 2017, down from its previous forecasts.

"Fitch has revised down its assessment of New Zealand's near-term growth prospects as the outlook for the prices of the country's agricultural exports have deteriorated," analyst Mervyn Tang said in a statement. "Weaker growth prospects have translated into a slower-than expected path of debt reduction."

In July last year, Fitch affirmed New Zealand's credit rating, saying the government was still reining in its operating deficit with a "credible and flexible" economic policy and "supportive business environment" and later said the surprise operating surplus for the 2015 year underscored the then-positive outlook.

The downgrade comes ahead of tomorrow's Reserve Bank policy review, which is expected to keep the official cash rate at a record low 2.5 percent. Economists anticipate governor Graeme Wheeler will have to drop his neutral bias later this year as cheap oil looks set to keep inflation below the 2 percent mid-point goal of the central bank's target band.

Fitch said the weak dairy prices are weighing on the nation's banking sector as a whole, and its negative outlook for lenders reflects the potential deterioration in asset prices as a second season of low milk product prices constrain the ability of farmers to meet their obligations.

"Delinquent loans have remained low so far as banks have supported farmers deemed to be viable," Tang said. "However, a prolonged period of low dairy prices could lead to a rise of non-performing loans from the sector, as well as sharper cutbacks in production and investment."

Prices for whole milk powder, the country's biggest commodity export, have remained subdued in early auctions this year, prompting processors Open Country Dairy and Westland Milk Products to reduce their forecast payout to farmers for the season.

Fitch said the Reserve Bank estimates the country's banking system can manage a severe downturn in the dairy sector, though that scenario doesn't include a broader economic slowdown or any correction in the housing market.

The rating agency said the government is still getting its books in order despite the "challenging economic environment", though it expects lower tax revenue and higher social welfare spending will deliver a deficit in the current financial year and lead to smaller surpluses than previously forecast.

The government's accounts for the first five months of the financial year released yesterday showed the Crown's operating deficit was wider than expected with the tax take running below expectations, though Treasury officials predicted some of that would reverse in later months.

BusinessDesk.co.nz

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