New Zealand's AA credit rating, stable outlook affirmed by S&P on monetary, fiscal flexibility

Tuesday 22nd March 2016

New Zealand's foreign currency credit rating was affirmed at AA with a stable outlook by Standard & Poor's, which said the nation enjoys monetary and fiscal flexibility and a resilient economy that offset the risks of high external debt.

The short-term rating was affirmed at A-1+. The stable outlook reflects S&P's expectation that New Zealand's fiscal performance "will improve over the medium term, offsetting vulnerabilities associated with its high external debt."

"We believe that the checks and balances in government are effective, and New Zealand ranks near the top of many surveys on governance, government efficiency, and business promotion," S&P said. "The Reserve Bank has strong credibility regarding its inflation mandate and its supervisory role."

The nation "benefits from a high-income and resilient economy, which we believe draws from decades of structural reforms and wage restraint," it said.

The Treasury is projecting a small budget deficit this year, as almost non-existent inflation and weak export commodity prices keep a check on tax revenue, before a return to surpluses starting in 2017. Finance Minister Bill English said last month the government has an extra $3.5 billion of spending tagged for the next two years which it can phase in as needed, depending on the track of the economy, which grew at a faster-than-expected 0.9 percent in the fourth quarter

S&P expects economic growth to slow to 2.7 percent in the year ended June 30, from 3.3 percent in the 2015 fiscal year, citing the impact of weak dairy export prices and tailing off of earthquake rebuilding work in Christchurch. That was offset by record migration, which is driving household consumption and property investment.

It sees net general government debt peaking at about 25 percent of gross domestic product in 2018, higher than its previous forecast of 24 percent of GDP.

The ratings company was concerned about New Zealand's weakening external performance, which was likely to expand the nation's "already high" external debt net of official reserves and financial sector external assets to more than 200 percent of current account receipts from about 160 percent in 2015.

S&P forecasts New Zealand's gross external financing needs will remain high at almost its current account receipts and reserves although the associated risks were somewhat mitigated by the depth of trading in the New Zealand dollar and the nation's exchange rate flexibility. It noted that the kiwi dollar was the 10th most actively traded currency in the 2013 Bank for International Settlements' triennial survey of foreign exchange trading.

It said New Zealand's Australian-owned banks are likely to retain ready access to external markets. While low dairy prices and the possibility of a disruptive housing market correction posed risks to the banking sector, "we currently believe that these risks are manageable."

BusinessDesk.co.nz

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