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S&P affirms New Zealand's 'AA' credit rating on solid economy, fiscal prudence; kiwi gains

Friday 20th January 2017

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Standard & Poor's affirmed New Zealand's credit rating, saying the economy's solid growth looks set to continue and the Crown's fiscal management remains prudent. The kiwi dollar gained. 

The global rating agency kept the sovereign foreign currency credit rating at 'AA', local currency rating at 'AA+', and short-term rating at 'A-1', with a stable outlook, saying the nation benefitted from strong institutions, an effective government and credible Reserve Bank. The kiwi rose to 72.18 US cents from 71.84 cents immediately before the release. 

"New Zealand benefits from a high-income and resilient economy, which we believe draws from decades of structural reforms and wage restraint," S&P analysts Craig Michaels and Anthony Walker said in a note. "We expect strong net migration to continue to support growth, through strong residential investment and solid consumption growth, while business investment is also likely to remain firm." 

ASB Bank economists predict New Zealand's economy will grow 3.5 percent in 2017 as the nation's construction and tourism booms continue, and as a recovery in dairy prices revitalises a moribund rural sector. 

S&P expects New Zealand's gross domestic product will continue to grow near the 2.7 percent pace in the year ended June 30, 2016. The rating agency predicts that expansion and currency appreciation over the past year will likely lift GDP per capita to US$39,000 in the 2017 fiscal year from US$34,000 in 2016. 

Increased spending on residential property is seen as alleviating rapid house price appreciation in Auckland, which has seeped into other parts of the country, and while a correction in the housing market is still deemed to be an elevated risk, it's unlikely to heighten in the next two years. 

"We believe the recent trend of higher repricing of home loans, in response to margin pressures and rising global yields, is likely to remove some cyclical demand from New Zealand's housing market, though we expect a number of structural challenges will ensure risks remain elevated," S&P said. 

However, the threat posed by a downturn in the dairy sector had eased, reducing pressure on bank loans to those farmers. "Nevertheless, we expect that many dairy farmers will remain reliant on the extraordinary support of their lenders, given the surge in dairy sector debt in recent years," the analysts said. 

S&P affirmed its 'stable' outlook on the prospect of the government's books either getting better or maintaining the status quo in coming years, having "made substantial headway" since the 2008 global recession and 2010 and 2011 Canterbury earthquakes. 

The current account deficit is seen to remain in a range of 3-to-4.5 percent of GDP over the next few years due to cheaper imports, while external debt is seen to be stable at about 190 percent of current account receipts. 

S&P said New Zealand's current account deficit is traditionally linked to funding for the nation's four major banks, which are Australian owned. The parent banks' ratings face downward pressure due to the negative outlook hanging over Australia's sovereign rating "and the increasing likelihood that we will revise downward our assessment of the government's supportiveness toward Australia's banking sector to supportive from highly supportive." 

That could have a flow-on effect on the New Zealand subsidiaries and their cost of funding, although S&P said it expected local lenders "will retain ready access to external markets". 

 

BusinessDesk.co.nz

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