Surplus surprise underscores NZ's positive ratings outlook: Fitch

Thursday 15th October 2015

New Zealand's unexpected budget surplus "underscores" Fitch Ratings' positive outlook on the sovereign AA rating, although questions linger about the health of the dairy sector.

Yesterday, Finance Minister Bill English announced an operating balance before gains and losses (obegal) surplus of $414 million for the 12 months ended June 30, better than the deficit of $684 million predicted in the May budget, and a turnaround from the shortfall of $2.8 billion a year earlier. That ended six years of red ink, as the economy maintained enough momentum to lift the government's tax take, while it kept a lid on spending increases.

Fitch said the improvement in the government's revenue "may be sustained into FY16" but volatility in the dairy sector, which produces New Zealand's largest export commodity, would be "an important determinant of revenue growth".

"New Zealand's fiscal outlook remains sensitive to global economic conditions and dairy prices in particular," the agency said. "The economy remains sensitive to a negative external shock, including a rapid rise in external borrowing costs and/or prolonged weakness in the dairy sector."

In July, Fitch affirmed New Zealand's AA credit rating, saying the government was still reining in its operating deficit with a "credible and flexible" economic policy and "supportive business environment." At the time the ratings agency flagged the rating could be upgraded if central and local government reduced their deficits and improved public debt ratios, and if the current account deficit shrank.

Yesterday's surplus underscores Fitch's expectation for deficit reduction to continue and public debt to decline after 2017.

BusinessDesk.co.nz

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