Credit rating agency affirms NZ's sovereign credit ratings

Standard & Poor's has affirmed its AA foreign currency long-term credit rating on New Zealand and its AA+ long-term local currency rating. And the rating outlook remains stable.

S&P credit analyst Craig Michaels said the New Zealand sovereign ratings reflect this country's fiscal and monetary policy flexibility, economic resilience, public policy stability, and financial sector.

S&P also said it expects the Government's budget position to improve, with cash deficits declining to 0.2% of Gross Domestic Product (GDP) by 2017 from 3.6% in 2013. And Michaels said fiscal consolidation was expected to be pursued regardless of which party was in power.

Meanwhile, S&P also noted that whilst New Zealand's government finances aren't strained, private-sector balance sheets - especially in the banking system - carry a high level of external liabilities.

The economy’s external debt overall, net of official reserves and financial sector external assets, amounts to an estimated 260% of current account receipts in 2013. S&P says this ratio is among the highest among all the sovereigns it rates.

The credit rating agency forecasts New Zealand's current account deficits will widen to about 6% of GDP by 2015, from almost 5% in 2012, reflecting a weakening trade balance and increasing income deficit.

"Downward pressure on the New Zealand ratings could emerge if New Zealand's external position deteriorates materially. On the other hand, upward pressure on the ratings could eventually emerge if stronger export performance and higher public savings markedly reduced external debt," Michaels said.

See credit ratings explained here.

Here's S&P's full statement:

Standard & Poor's Ratings Services said today that it had affirmed its 'AA' foreign currency long-term rating on New Zealand. At the same time, we affirmed the local currency long-term rating at 'AA+'. We also affirmed the local and foreign currency short-term ratings at 'A-1+'. The rating outlook remains stable. The Transfer & Convertibility assessment remains 'AAA'.

"The ratings on New Zealand reflect the country's fiscal and monetary policy flexibility, economic resilience, public policy stability, and financial sector," Standard & Poor's credit analyst Craig Michaels said.

"Moderating these strengths are New Zealand's very high external imbalances, which are accompanied by high household and agriculture sector debt; and dependence on commodity income."

New Zealand benefits from a high-income and resilient economy, with 2013 per capita GDP of US$37,200. We believe this resilience draws from decades of structural reforms and wage restraint. We expect real GDP per capita to grow at about 1.5% per annum over the next few years.

Growth will be driven largely by the post-earthquake reconstruction in Christchurch. Beyond this, low interest rates and strong underlying demand will also support residential construction in Auckland, which may also underpin related consumer spending. Meanwhile, fiscal consolidation weighs on the growth outlook, as does (in the near term) drought conditions that prevailed earlier in 2013.

New Zealand's public finances have worsened as a result of the global recession and the unavoidable repair and reconstruction costs associated with the Canterbury earthquakes, with a peak general government cash deficit of 6.9% of GDP in 2011. At the central government level, we expect the sovereign's budget position to improve, with cash deficits declining to 0.2% of GDP by 2017 from 3.6% in 2013. We believe fiscal consolidation will be pursued regardless of which party is in power.

While New Zealand's government finances are not strained, private-sector balance sheets--particularly in the banking system--carry a high level of external liabilities. Overall, the economy’s external debt, net of official reserves and financial sector external assets, amount to an estimated 260% of current account receipts in 2013. This ratio is among the highest for rated sovereigns.

In addition, there is a large market for nonresident offshore issuance in New Zealand dollars (the Eurokiwi and Uridashi markets), which can affect foreign exchange movements. This market totaled about 9% of New Zealand’s GDP at March 2013, and contributes to the liquidity of the New Zealand-dollar foreign exchange market. The kiwi dollar is ranked 10th of actively traded currencies on the 2010 Bank for International Settlements' triennial survey of foreign exchange trading.

New Zealand's current account deficits are traditionally associated with external borrowings by its banks. The parent companies of the four major banks are headquartered in Australia, and the Australian banking system, in turn, is highly reliant on external funding. The New Zealand major banks use external sources to supplement their funding for, among other areas, domestic residential housing and investment in agriculture. We believe that these banks will retain ready access to external markets, as evidenced by our BICRA score of ‘3’ (see “Banking Industry Country Risk Assessment: New Zealand” published on Ratings Direct, Dec. 6, 2012.)

We forecast that New Zealand's current account deficits will widen to about 6% of GDP by 2015 (from nearly 5% in 2012), reflecting a weakening trade balance and increasing income deficit. We expect that New Zealand’s dairy exports, which represent 25% of merchandise exports, will continue to grow in volume terms throughout the forecast horizon. During this time, we forecast that New Zealand’s gross external financing needs to remain over twice the level of its current account receipts plus reserves.

Also underpinning the ratings on New Zealand are its strong institutions. We find that the Reserve Bank of New Zealand has strong credibility regarding its inflation mandate and its supervisory role. We note that it has recently taken additional macro-prudential measures to help suppress further rises in what appears to be a very strong housing market. 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.

We have maintained a one-notch distinction between the long-term foreign currency and local currency ratings in light of the credibility of monetary policy, the freely floating currency, and the depth of domestic debt markets. Monetary flexibility can underpin a sovereign's greater debt-servicing flexibility in its own currency.

Mr. Michaels added: "The stable outlook balances the stabilization we expect between the government's debt profile over the medium term and the risks associated with the country's high external debt. The outlook is premised on our expectation that New Zealand’s financial system will remain sound and its government finances robust."

Downward pressure on the New Zealand ratings could emerge if New Zealand's external position deteriorates materially. On the other hand, upward pressure on the ratings could eventually emerge if stronger export performance and higher public savings markedly reduced external debt.