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S&P watching for incentives in new Budget

Monday 16th May 2011

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Standard & Poor's will be watching incentives to save as well as net external liabilities levels in Thursday's government Budget.

The credit rating company put New Zealand's AA plus credit rating on negative outlook last November and is also changing the criteria it uses for all government credit ratings.

S&P expects to release a short bulletin after the Budget on Thursday. ANZ economists said today that the Budget will do enough to avert a credit rating downgrade.

The Government has signalled a record $16 billion to $17 billion operating deficit for the 12 months to June 30 because of the Christchurch earthquakes and other factors.

S&P sovereign ratings credit analyst Kyran Curry told NZPA that S&P would like to see a path to an operating surplus over the medium term.

"We don't provide targets or trigger points," he said.

S&P understood that deficits were cyclical, reflecting a weaker economic environment, and was prepared to "look through" the impact of the earthquakes.

Nevertheless, a significant weakening in the operating position was something that added pressure to ratings.

"The thing that is driving the negative outlook is the growth in the net external liabilities," he said.

To stabilise the outlook at the current ratings level S&P was looking for a sustained improvement in the external side.

"Anything that promotes savings would be a good thing because New Zealand is dependent on foreign savings because its level of domestic saving is low," Curry said.

The Government has signalled changes to KiwiSaver, without giving details, but Curry did not want to get into a debate about individual policies.

He said New Zealand governments produced credible forecasts and "tend to do what they say they will do" unlike some countries in Europe.

The country was first class in the way it set out its accounts and engaged with credit rating agencies.

It was also a country of "very strong fiscal conservatism".

S&P was currently testing its new criteria for sovereign risk and was hoping to have it settled in a couple of months. It was also reviewing its criteria for bank ratings. It would still use the old criteria until the new criteria was finalised.

S&P has said previously that a risk would be a significant weakening in the credit quality of New Zealand's banking sector, which was largely owned by the Australian banks

Reserve Bank of New Zealand governor Alan Bollard said last week that sovereign credit rating risk and bank credit rating risk were different.

He said New Zealand banks had come through the global financial crisis in pretty good shape and credit rating agencies could be the "ultimate lagging indicator on the crisis" if they changed bank ratings now.



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