New Zealand's credit rate outlook lowered to 'negative' by Fitch

Thursday 16th July 2009

New Zealand’s sovereign credit rating outlook was lowered to ‘negative’ from ‘stable’ by Fitch Ratings, which cited the nation’s looming current account deficit and rising from debt levels.

New Zealand has an AA+ long-term and F1+ short-term foreign currency rating, and an AAA local currency rating at Fitch.

“Despite the recession, the current account deficit remains large and is projected to remain above the level necessary to stabilise and reduce New Zealand's net foreign liabilities,” said Ai Ling Ngiam, director of Fitch’s Asia-Pacific sovereign team, in a statement.

“A stronger fiscal adjustment than currently planned may be required to raise national savings and reduce the current account deficit, as well as structural reforms to improve productivity.”

The dimmed credit rating outlook revives concern about New Zealand's economic strength, after the government’s budget, which included suspension of pension payments, delay of tax cuts and tightened government spending, helped convince Standard & Poor’s to raise the sovereign outlook to ‘stable’. The current account gap narrowed to 8.5% of GDP in the year through March, from 8.9% in the same period three months earlier.

Making a readjustment more difficult are New Zealand’s “historically low real interest rates and the current accommodative fiscal stance,” Fitch said. “There is a risk that the required balance sheet adjustment by households and, more generally the private sector, will be insufficient in reducing the current account deficit and foreign indebtedness to a more sustainable and safe level,” it said.

“More aggressive restoration of public finances through fiscal prudence will be needed to raise the national savings rate to counter weak private savings,” it said.

Fitch said New Zealand risks falling into “a low-growth trap as foreigners demand higher returns as an incentive to continue lending.” The nation’s propensity to spend more than it earns will have the effect of “gradually eroding New Zealand's fundamental credit strengths, including strong public finances, and rendering it more vulnerable to future adverse shocks," it said.

The outlook downgrade implies a greater than 50% percent chance the rating would be cut, it said.

While the banking sector is underpinned by strong overseas parent companies, “the reliance on short-term foreign funding by local banks remains a potential source of risk if a more abrupt adjustment was imposed at some future date on New Zealand by international markets and its creditors,” Fitch said.

Businesswire.co.nz

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