Fitch affirms NZ's sovereign credit rating at AA; sees Govt unlikely to meet target of budget surplus of 2014/15; sees surplus more likely in 2015/16; not a problem for rating

Credit ratings agency Fitch has affirmed New Zealand's sovereign credit rating at AA and commented it saw the government's budget unlikely to return to surplus until 2015/16, which would be a year later than the government's target. However, it said this slippage was unlikely to affect the AA credit rating. Here is the Fitch statement below:

Fitch Ratings has affirmed New Zealand's (NZ) Long-term Foreign- and Local Currency Issuer Default Ratings (IDRs) at 'AA' and 'AA+', respectively. The Outlook is Stable. The Country Ceiling has also been affirmed at 'AAA', and the Short-Term Foreign Currency IDR at 'F1+'.

The ratings reflect Fitch's view that high external indebtedness and below median average incomes remain key weaknesses of the sovereign credit profile, particularly in comparison with its highly rated OECD peers. Offsetting this is NZ's strong track record of monetary policy management, prudent fiscal management, high level of economic development, and a strong governance and business environment.

Despite lingering global economic weakness and domestic fiscal austerity, Fitch expects reconstruction of Christchurch following the 2011 earthquake to cause GDP growth to accelerate and average 3% over the forecast period (to 2014). This is expected to cause the current account deficit (CAD) to widen toward 7% of GDP from 4.1% in 2011. The agency notes, however, that CAD widening will partially be financed by outstanding reinsurance settlements equivalent to 5.9% of 2011 GDP and foreign direct investment inflows, limiting the impact on net external indebtedness. Fitch expects net external debt (NXD) to remain broadly flat over the forecast period.

Continued household deleveraging and reduced banking sector reliance on short-term wholesale funding have led to reductions in gross (GXD) and NXD ratios in recent years. At end-2011, NXD was 70% of GDP in USD terms, down from 93% at end-2009. Fitch believes CAD widening and persistent NZ dollar strength relative to historical trends pose risks to the durability of these improvements and broader macroeconomic rebalancing. Despite the recent improvement, NXD remains significantly above the 'AA' range median of -18% of GDP.

A central focus of NZ's policy response to high external indebtedness has been to facilitate a structural shift in household savings behaviour. The return of a positive net household savings rate in the financial year ended March 2011 (+0.1% of GDP compared with -0.8% in 2010) suggests these policies may have gained traction. Fitch believes it remains too early to determine if this represents a structural shift or is a cyclical response. If it is structural in nature, it could permanently reduce gross external indebtedness. The associated build-up of domestic financial assets also has the potential to enhance sovereign funding flexibility over the longer-term.

Political consensus remains strongly supportive of fiscal consolidation, with curbing expenditures the main policy focus. The authorities target a return to fiscal surplus in fiscal year-end June 2015 (FY15) and reducing net core Crown debt to 20% of GDP by FY20 from a projected peak of 28.7% in FY14. The agency believes uncertainties surrounding the total cost of rebuilding Christchurch, as well as the potential revenue impact of fiscal austerity and lingering weakness in the global economy, may impede these efforts. As such, Fitch expects a return to fiscal surplus only in FY16 but would not view such a delay as having a negative rating impact.

Sustained improvement in NZ's external finance ratios and continued household deleveraging would address a number of weaknesses in the sovereign credit profile. Strengthening of the public finances via an earlier-than-expected return to fiscal surplus and a reduction in general government debt ratios from 45% of GDP in 2011, relative to 'AA' and 'AAA' peer medians of 28% and 47% respectively, would support the ratings. The implementation of growth-supportive structural reforms would complement such developments.

An erosion of the commitment to austerity, further upward revisions to earthquake reconstruction estimates and the consequent fiscal costs, or fiscal slippage driven by other causes, could weigh on the ratings. A significant deterioration in wholesale external funding conditions for the banking system that impairs its ability to finance domestic economic activity, though unlikely in Fitch's view, could put downward pressure on the ratings.