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S&P affirms New Zealand's AA credit rating, unperturbed by new govt spending plans

Wednesday 31st January 2018

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Global ratings agency Standard & Poor's has affirmed New Zealand's 'AA'  sovereign credit rating, saying the new government's plans to lift spending will be a bigger contributor to growth in the future, but are funded through cancelled tax cuts and won't undermine the outlook. 

The ratings agency yesterday affirmed the 'AA' foreign currency and 'AA+' local currency long-term sovereign credit ratings for New Zealand and maintained a stable outlook, saying the nation benefited from its flexible fiscal and monetary policies, resilient economy and stable public policies. S&P anticipates real economic growth of 2.8 percent between 2018 and 2020 driven by cheap credit, a larger population and increased government spending, with consumer spending and business investment likely to stay firm. 

"Our ratings reflect solid fiscal performance and our expectation that higher government spending will not materially weaken the country's fiscal profile," analysts Anthony Walker and Kim EngTan said in their report. "New spending measures, including more generous welfare, education, and housing policies, are partly funded through the cancellation of the previous government's proposed personal income tax cuts. As such, we do not expect the measures to materially affect the government's fiscal position."

The new government's spending programme so far projects smaller surpluses than the previous administration over the next two years, before generating bigger ones later in the forecast horizon, and the latest Crown accounts show the tax-take is still being bolstered by strong consumer spending and a larger workforce paying more income tax. 

S&P said New Zealand's sovereign rating could get upgraded if the government budget improves in a sustained way which enhances the resilience to macroeconomic and financial sector risks caused by the nation's high level of external debt, but could also get downgraded if the fiscal performance, debt profile, or banking metrics were substantially weaker than the ratings agency's assumptions. 

The ratings agency noted New Zealand's softer property market, saying risks from rising house prices and household debt stabilised in 2017, but will take sometime to subside. 

The country's external imbalances remain the key risk, and S&P projects the current account deficit will widen in 2019 to be in line with historic levels of about 3 percent of gross domestic product. S&P predicts New Zealand's external debt, excluding official reserves and financial sector external assets, to be "very high" relative to its peers at about 185 percent of current account receipts over the next few years before decreasing slightly.  

"New Zealand's current account deficits are traditionally associated with external borrowings by its banks to fund its growth," the report said. "The possibility that foreign investors become less willing to fund banks at low interest rates poses a risk to the banking system, the broader economy, and, in turn, government finances."

While S&P expects the lenders will retain ready access to markets, it says the risks to the banking sector remain elevated due to the possibility of a sharp correction in property prices

The ratings agency said the Reserve Bank's inflation mandate and supervisory role have "strong credibility" and it believes the central bank will stay operationally independent from the government, which is reviewing the monetary authority's governing legislation.


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