S&P's view on the Budget

Thursday 19th May 2011

Standard & Poor's says the budget is consistent with the assumptions that feed into its sovereign ratings on New Zealand and left its AA plus rating on negative outlook.

The budget foresees an operating deficit, on accrual basis excluding investment gains and losses, of $16.7 billion (8.4% of GDP) in fiscal 2010-2011 (ending June 30, 2011) compared to the $11.1 billion (5.5% of GDP) foreshadowed in the Half Year Economic and Fiscal Update announced in December 2010. Much of the increase reflects the immediate costs (including search and rescue, temporary welfare and housing payments, and demolition and repairs to infrastructure) associated with the two Christchurch earthquakes.

Modest increases elsewhere in health, education, and justice spending have been largely offset by reprioritisation in spending elsewhere and in civil-service reforms. The deficit is considerably higher than the $6.3 billion (3.3% of GDP) deficit recorded in 2009-2010.

While the budget foreshadows lower assistance to some families and students, and KiwiSaver pension savings reforms over the forward estimates, further fiscal deficits of $9.7 billion (4.7% of GDP) and $4.1 billion (1.8% of GDP) are predicted in fiscals 2011-2012 and 2012-2013, respectively.

“The budget provides for the Crown’s balance returning to a small surplus of $1.3 billion (0.5% of GDP) in 2014-2015—a year earlier than our previous expectations,” said sovereign analyst Kyran Curry

“The government now expects additional borrowings to fund the cost of the earthquakes will result in gross Crown debt peaking at about 37.9% of GDP in 2013-2014, which is half the level of the 2011 median l for 'AA' rated sovereigns.

The ratings on New Zealand reflect the country's fiscal and monetary policy flexibility, strong institutions, economic resilience, and actively traded currency. New Zealand's credit quality is weakened by its high external liabilities, despite some deleveraging in recent years.

Curry added: "The negative outlook on the New Zealand foreign currency rating reflects the possibility of a downgrade if New Zealand's external position does not improve. Achieving the government’s stated fiscal targets will be an important component of such an improvement. Public finances may need to be adjusted faster if New Zealand's real cross-border interbank funding costs rise. On the other hand, the ratings could stabilise at the current levels upon a sharper-than-expected improvement in the external accounts, led by stronger export performance and higher public savings.”

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