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High private foreign debt costs NZ credit rating one notch

Friday 30th September 2011 1 Comment

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New Zealand's credit rating has been cut one notch by Fitch Ratings, citing the country's high levels of external debt as a "key vulnerability".

The world's third biggest credit ratings agency cut the nation to AA from AA+, with the outlook stable, on concerns that the country's external debt may balloon if it does not narrow the current account deficit.

The agency also cited high household indebtedness and eroding public finance as contributing factors.

Recent government data showed that New Zealand’s current account deficit widened in the second quarter, rising to $2 billion in the three months ended June 30 from $1.53 billion in the previous quarter.

The announcement knocked 1.4% off the New Zealand dollar, with the currency recently trading at 76.66 U.S. cents.

"We always knew it was a possibility," said Khoon Goh, head of market economics and strategy at ANZ New Zealand. "Fitch was the first one to put New Zealand on negative outlook, and from that point of view they have always been more stringent around New Zealand's external vulnerabilities than the other ratings agencies."

Fitch also acknowledged that while New Zealand household debt was on par with other AAA rated countries like the U.S., U.K. and Australia, little progress had been made in clawing this back.

As of June the country's net external debt hit 70% of annual gross domestic product.

"We've been downgraded before in the aftermath of Asian crisis, and we managed to get upgraded once the storm passed so I'm not too concerned," said Goh. "I don't see it increasing New Zealand's risk premium - the difference between AA+ and AA is not that big.

"Markets are likely to take some heart from the stable outlook, which Fitch said was due to its creditworthiness supported by moderate public indebtedness, fiscal prudence, and strong public institutions.

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Comments from our readers

On 30 September 2011 at 4:33 pm Arty said:
One would expect the small number of us that save to be in a strong position. But no, save all your working life and end up funding the debtors who claim they cannot pay true market rates for money. My advice - don't save borrow borrow borrow, and buy property, inflation pays the interst cost at the current levels. Low interst rates fix nothing - that is proven over and over.
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