NZ credit rating outlook lowered by S&P

Tuesday 13th January 2009

The outlook on New Zealand's AA+ foreign-currency credit rating was lowered to 'negative' by Standard & Poor's (S&P) to reflect the nation's looming current account gap and rising fiscal deficits.

The revision reflects New Zealand's "narrowing economic policy flexibility in light of the country's widening external imbalances, as evidenced by the sizeable current account deficit," S&P credit analyst Kyran Curry said in a statement. The New Zealand dollar tumbled to a four-week low after the statement.

The nation's current account deficit widened to $15.5 billion, or 8.6% of gross domestic product in the year ended September 30. The prolonged recession is eroding the government's tax revenue at a time it wants to accelerate spending on major infrastructure projects and Finance Minister Bill English last month predicted budget deficits will remain until 2013.

The deficit will balloon to $10.9 billion by 2011, amounting to 5.6% of GDP, according to Treasury forecasts.

The kiwi dollar dropped to 56.45 US cents from 57.20 before the statement.

The currency was already down on the day after a report showed business confidence tumbled in the fourth quarter with companies the gloomiest about their own prospects since at least 1970.

A net 64% of companies expect the New Zealand economy will deteriorate over the next six months, according to the New Zealand Institute of Economic Research.

Fiscal deficits are "not uncommon given the cyclical weakening of tax revenue and the countercyclical fiscal measures taken by the government," Curry said. Still, "market confidence may wane until policymakers articulate a plan for medium-term fiscal consolidation."

S&P affirmed the nation's AAA local currency rating and its A-1+ short-term ratings.

By Jonathan Underhill

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