Standard and Poor's says NZ sovereign credit rating not immediately affected by earthquake, will monitor situation

Read S&P's statement below:

Standard & Poor's Ratings Services today said that its ratings on the New Zealand sovereign (AA+/Negative/A-1+ foreign currency, and AAA/Stable/A-1+ local currency) are not immediately affected by Tuesday's earthquake in Christchurch.

The ratings on Christchurch City Council (AA+/Negative/A-1+), Christchurch City Holdings Ltd. (AA+/Negative/A-1+), and Christchurch International Airport Ltd. (A-/Stable/A-2) are also unchanged.

Christchurch is New Zealand's second-largest city and the largest commercial centre on the South Island, with a population of about 370,000. On Feb. 22, 2011, a large earthquake (6.3 on the Richter scale) struck the city and the surrounding Canterbury region, causing significant loss of life, and damage to property and infrastructure.

In our view, it is still too early to assess the overall implications of the considerable disruption to the Canterbury region and the broader New Zealand economy.

We note that New Zealand's financial system remains operational and will support an inevitable period of increased activity associated with the extensive reconstruction and repair work. Nevertheless, as the situation in New Zealand is rapidly evolving, we will continue to monitor developments.

We expect that lower revenue and the recovery costs will weaken the general government's finances. The extent of fiscal deterioration will only become clear once a more detailed assessment of the damages of the Christchurch earthquake is available. In our view, the government has sufficient flexibility to absorb additional fiscal costs without a negative impact on its creditworthiness.

New Zealand's government finances are currently a credit strength. General government debt burden (net of liquid assets) is currently estimated to peak at around 34% of GDP in 2015, which is still well below 69%--the peak in the median level for 'AA' rated sovereigns in 2011 estimates.

Moreover, we note that there is considerable scope for the Reserve Bank of New Zealand to provide stimulus, if required. New Zealand’s rating is currently on negative outlook; its key weaknesses lie in its external position. The rating could be lowered if New Zealand’s external position deteriorates further, particularly due to rising cross-border funding costs of its banks. In regards to the rating on Christchurch City Council, we believe the council has some flexibility to take on additional debt.

Pressure on the rating is likely to come from either a significant deterioration in the revenue of both the council and its subsidiaries or a deteriorating local economy. At this stage, it is too early to assess the influence the earthquake will have on council revenue and, as noted above, the regional economy.

Meantime, we believe that Christchurch airport's operations are largely unaffected by the earthquake; we expect the airport will seek reimbursement via insurance to complete any repair work identified to date. We are in dialogue with management to ascertain any damage to the airport and progress work in the new terminal construction. In our view, the airport's liquidity is adequate.

However, downward rating pressure may emerge if: there were a substantial and prolonged negative impact on passenger traffic from any negative sentiment around tourism or travel to the region; future cash flow were materially affected by repair works; or the airport's operations were negatively affected. Our initial expectation is that most ratings on financial institutions will remain unchanged and New Zealand's financial system will remain stable, but there is a possibility that some ratings could be subject to downward pressure.

In particular, we believe the ratings on some smaller entities operating in the Canterbury region could be affected (see related story).

The earthquake will also place further downward pressure on the earnings of the general insurers in New Zealand, but the capital strength and extensive reinsurance protection of major general insurers would limit negative rating pressure at this stage (see separate media release titled "Christchurch Earthquake Will Worsen Insurance Earnings, But Capital And Reinsurance Remain Rating Strengths").

However, the rating on New Zealand’s Earthquake Commission (EQC; AAA/Stable/--) remains unchanged despite its significant exposure to the earthquake (see separate media release titled "Earthquake Commission Rating Unaffected By Exposure to Christchurch Disaster"). EQC is the government-owned insurer in New Zealand for damage to residential dwellings and contents arising from natural disasters.