NZ's foreign currency rating may be downgraded if budget not good enough

Credit ratings agency Standard and Poor's has revised its outlook on New Zealand's foreign currency rating from stable to negative, pointing to the country's "sizeable" 8% current account deficit. They indicated that government's next budget will be the key as to whether the rating is downgraded, saying a credible medium-term fiscal plan was needed for the rating to stabilise. "The outlook revision on the foreign currency rating is motivated by our view of New Zealand's narrowing economic policy flexibility in light of the country's widening external imbalances, as evidenced by the sizeable current account deficit (about 8% of GDP in 2008)," the ratings agency said. The Reserve Bank will be watching the rating closely because a downgrade could partially counter the lowering of the Official Cash Rate. A lower rating will mean the pricing of New Zealand's overseas debt will go up because of poorer credit quality. In effect, this could result in pushing up interest rates. The next announcement from the Reserve Bank on the OCR will be on January 29. Economists are predicting the OCR will be lowered to between 4% and 3.5% by mid-2009. Standard and Poor's affirmed New Zealand's 'AA+' foreign currency rating and its 'AAA' local currency long-term rating as well as its A-1+' short-term ratings on New Zealand and the ratings on the country's debt issues. "New Zealand's next budget will, in our view, be a key indicator of the government's intent regarding medium-term expenditure cuts and reprioritising of policy initiatives. A credible medium-term fiscal plan combined with an easing of New Zealand's external imbalances could result in the ratings stabilising at the existing levels. Absent such developments, the foreign currency rating could be lowered," Standard & Poor's sovereign analyst Kyran Curry said. Finance Minister Bill English responded to the statement by Standard and Poor's, saying: "In our view, while the current account deficit is large and has been growing, it is likely to narrow somewhat in the next few years. In the meantime, the government is committed to the kind of fiscal policy consolidation that Standard and Poor's has referred to." "In that regard, any calls for further fiscal stimulus need to be weighed up against the consequences of taking on further debt," English said. "Complacent policies and ill disciplined spending in recent years have increased New Zealand's vulnerability to the world recession. We have inherited an economy in recession, a large current account deficit, and sharply deteriorating government finances." At time of publishing, the New Zealand dollar was at 56 USc, down from 58 USc at the start of the day (January 13).