By NZPA
Monday 16th July 2007 |
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S&P credit analyst Kyran Curry said the sovereign ratings were underpinned by the country's strong fiscal position and conservative macroeconomic management, which together supported a flexible and resilient economy.
Robust public sector finances and the Government's net creditor position mitigated the risks associated with a range of external and internal imbalances, but did not eradicate those risks entirely, Curry said.
New Zealand's key vulnerability stemmed from the country's persistently large current account deficits and subsequent high level of external debt.
While New Zealand had historically run current account deficits, the situation of the past few years was notable for the deficits' size and composition.
The current account deficit had been running around 9% of gross domestic product in the past few years and a sudden improvement was unlikely, with deficits of about 7.5% during the next few years projected, he said.
That compared with an average of around 4.5% of GDP throughout the 1990s.
Further, the increase in the current account deficit in the past few years was not a result of capacity-building investment. Rather it had resulted from import growth to sustain high levels of consumer spending and a dwelling boom, Curry said.
Domestic stresses also presented a risk to the outlook. They arose from an unbalanced growth pattern, reflected in little sign of spare capacity in the labour market, upward pressure on house prices, and inflationary pressures that appeared likely to accumulate in the medium term despite already very high interest rates.
The imbalances in the economy did not threaten credit quality, he said. The most likely scenario was a gradual unwinding of those imbalances and growth remaining around 2.5% during the next few years as a stronger external sector offset weaker domestic demand, he said.
"There is some risk of a more traumatic scenario where the country slips into recession due to an external shock or significant change in investor sentiment.
"This would have a large and immediate negative impact on the Government's finances. However, the low level of net debt provides a strong buffer to absorb any such shock without threatening credit quality," Curry said. "Only a significant and unexpected weakening of government fiscal policy is likely to lead to a downgrade in the next few years."
S&P's sovereign credit ratings on New Zealand are AA+/A-1+ for foreign currency, and AAA/A-1+ for local currency.
Finance Minister Michael Cullen said the S&P decision underscored the wisdom of the Labour-led Government's prudent fiscal management, particularly its savings policies.
"We have an appetite for debt when we should be saving more," Dr Cullen said.
"This is a timely reminder of why KiwiSaver is so important to the future financial security of individuals and the well being of our economy."
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