Standard & Poor's says it can wait till May budget before looking at NZ credit rating, but warns private sector on overseas debt

By Alex Tarrant

Credit rating agency Standard and Poor’s says it is happy to wait until the government budget in May before it makes any decisions on New Zealand’s sovereign credit rating, but it is warning the private sector it needs to control its overseas debt.

Finance Minister Bill English said yesterday the New Zealand government’s net debt could rise above 30% of Gross Domestic Product (GDP), from previous forecasts of a peak of 28.5%, as the government increased its debt programme to pay for costs arising from the two devastating Christchurch earthquakes.

Standard and Poor’s placed New Zealand’s AA+ credit rating on negative outlook in November, signaling a one in three chance of a ratings downgrade in the next two years. However the move was mainly due to how S&P had revised the way it assessed private sector debt after the Euro debt crisis.

S&P analyst Kyran Curry told interest.co.nz the agency’s view on the government’s rating hadn’t changed after yesterday’s announcement from English.

“We don’t believe that there is any immediate impact on the ratings given the government has some flexibility to absorb the weaker revenue numbers and lower economic growth, plus the higher fiscal costs,” Curry said.

“The fiscal position of the government, although it’s weakening, is still a credit strength for New Zealand relative to New Zealand’s peers,” he said.

“But that said, the minister talks about there being careful decisions that are required by spending and prioritising the government’s spending with a more longer-term perspective to place the government’s fiscal position on a more stable footing, and to boost public saving.”

S&P would be looking for an indication of what those decisions were and when they would be made.

Eyes on Budget

“We’re expecting, in the budget coming up, the government will have a more clearly articulated plan to reprioritise its spending. We’d be hoping the budget would have that for us,” Curry said.

It would be a useful indicator to see how the government intended to address in more detail some of the fiscal challenges it faced.

Everything else being equal, unless there was a dramatic reassessment of the cost of the quakes to the government, at this stage S&P thought it had fully factored in New Zealand’s challenges.

However, New Zealand’s external debt position was “something that’s occupying our minds more at the moment,” Curry said.

“It really speaks to what the Minister’s talking about – the high level of net external debt and it’s the key factor that separates New Zealand from many of its peers. We’ve traditionally noted that that’s the single biggest factor that weighs on the ratings  in New Zealand,” he said.

“The current account deficit, and the external position has improved in the last couple of years, but that, we believe, is a cyclical improvement. If the government’s own forecasts are realised, in terms of its current account deficit, then that external position will continue to weaken as the economy recovers.

“We’ve usually looked at the strength of the government’s balance sheet to offset some of those risks. Well at the moment we’ve got that twin weakening in the [government’s] balance sheet, plus [weakening] on the external side likely to come,” Curry said.

It was a stabilisation of New Zealand’s net external position that was going to stabilise the country’s credit quality.

“If New Zealand then takes on a lot more borrowing, then that could be a different story. But the sort of borrowing that the minister’s talking about is not likely to be enough for us to be thinking that New Zealand’s credit metrics are no longer consistent with a AA+,” Curry said.

“It’s debt levels are still a lot lower than what its peers are,” he said.

“It’s the way we think about when we assign these ratings. It’s not just the fiscal side, but it’s the external side that we worry about.

“[The minister] talks about our negative outlook reflecting the weakening in the government’s fiscal position. But it’s more on the external side that’s motivating our negative outlook – the net external debt,” Curry said.

Warning to private sector

Although it did not help that the government’s fiscal position was weakening, S&P had its eye on the private sector’s foreign debt.

“If the current account deficit gets back to where even the government’s own forecasts are predicting it to be, that implies further rises in private sector borrowing, household borrowing to fund consumption,” Curry said.

“New Zealand’s already in a place where it’s net external debt is amongst the highest that we see and if it just continues to grow, New Zealand’s just moving to an area that it wouldn’t be consistent with a AA+ rating,” he said.

“While we don’t believe that’s going to happen any time soon, and if we did we would move the ratings lower, the negative outlook really is flagging a one-third chance that’s going to happen.

“The key message from this is that we’ll be looking for the budget to articulate a clearer path for the government to reprioritise its spending and just outline in a lot more detail what the minister has today about what the government’s going to do in terms of its borrowing and its operating position – how it’s going to get that deficit back.”

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