This is a Statement by Moody's Investors Service.
Moody's Investors Service has today affirmed Government of New Zealand's Aaa issuer rating. The stable outlook is maintained.
The factors driving the rating affirmation and stable outlook are Moody's expectations that:
(1) New Zealand's economic resilience remains very high, supported by strong growth;
(2) The country's institutional strength remains similarly high, with proactive implementation of policies likely to continue to mitigate external and domestic vulnerabilities;
(3) And the country's very strong fiscal position compared to peers provides high shock absorption capacity.
New Zealand's Aaa senior unsecured debt rating, the (P)Aaa senior unsecured MTN rating, the local currency other short-term and foreign currency commercial paper ratings at Prime-1 (P-1) are also affirmed.
New Zealand's long-term local and foreign-currency bond and deposit ceilings remain at Aaa. The short-term foreign-currency bond and deposit ceilings remain at Prime-1 (P-1).
RATINGS RATIONALE
RATIONALE FOR RATING AFFIRMATION AT Aaa
FIRST DRIVER -- VERY HIGH ECONOMIC RESILIENCE
We expect New Zealand's economy to be among the fastest growing Aaa-rated economies in coming years. Strong population growth, including through migration, bolsters the economy's potential. As incomes in China and the rest of Asia continue to rise at a solid pace, demand for New Zealand's products and services, including dairy, tourism and education, will also continue to support growth.
The economy is small and open, with a high dependence on agriculture exports to drive growth and incomes and reliance on foreign funding. However, in the event of shocks, the economy responds swiftly and positively to a weaker exchange rate and lower interest rates, as seen in recent years. Exchange-rate and interest-rate sensitive sectors such as tourism and construction generate economic activity and jobs to support income.
Longer term, New Zealand's potential GDP growth is higher than that of many Aaa-rated sovereigns. Demographic trends are supportive to medium-term growth compared to peers given robust immigration trends and slower aging. New Zealand ranks highest in the world for ease of doing business, according to the World Bank, another factor supporting its robust growth potential.
SECOND DRIVER -- PROACTIVE INSTITUTIONS WITH HIGHLY EFFECTIVE POLICYMAKING DELIVERING FISCAL AND FINANCIAL SECTOR STABILITY
New Zealand has very strong institutions, characterised by a very high degree of policy effectiveness. It has a proactive and credible central bank with a strong track record on monetary and financial stability. Its fiscal institutions have an equally strong record of managing shocks through effective fiscal policy.
For example, compared with many other central banks in advanced economies, the Reserve Bank of New Zealand (RBNZ) has engineered a fair amount of space to deploy in support of monetary policy. As the regulator of banks in New Zealand, the RBNZ is taking proactive measures to mitigate banking sector risks. The effectiveness of banking sector regulation is shown in our assessment of banks' financial strength.
The achievement of a budget surplus in 2014-15, in line with the budget projections three years earlier, highlights the very high level of policy effectiveness. Fiscal metrics improved swiftly in the aftermath of the 2008 recession and recent earthquakes and we expect them to continue to do so, with fiscal management remaining strong in coming years.
More broadly, New Zealand's credit profile is characterised by external vulnerability risks as a result of its large reliance on external financing, and by banking sector risk related to elevated household debt. While we think that the likelihood of these risks crystallising is low, they are somewhat more elevated than corresponding risks in many other Aaa-rated sovereigns.
Nevertheless, the very high strength of the institutions and, relatedly, our expectation that any fiscal or economic policy response would be proactive and effective, help mitigate these risks.
For example, the central bank's tightening in lending restrictions is working to cool the housing market, while further pre-emptive tightening measures are likely to be introduced to diminish the probability and reduce the negative consequences of a potential downturn in housing.
THIRD DRIVER -- VERY HIGH FISCAL STRENGTH OFFERS GREATER ABILITY TO RESPOND TO SHOCKS
New Zealand's economy is vulnerable to various shocks. Over the past decade, these shocks manifested in the 2008 global financial crisis, the 2011 Canterbury earthquake, the downturn in commodity prices from 2014-2016 and more recently, the Kaikoura earthquake.
The government's efforts over many years to preserve strong public finances provides it ample room to pursue expansionary fiscal policy to buffer the economy from any potential future shocks, which could stem from another natural disaster, a housing market correction or a sharp fall in global trade.
Moderate government debt levels around 30% of GDP give the government the capacity to implement stimulus policies, if required, to shore up economic growth. Overall, we expect increasing budget surpluses to help reduce gross government debt toward 28% of GDP in coming years -- significantly lower than the median for Aaa-rated sovereigns. With government debt at moderate levels, New Zealand has higher fiscal flexibility than in many other high-income economies.
RATIONALE FOR STABLE OUTLOOK
The stable outlook is anchored by our expectation that New Zealand will maintain strong fiscal and monetary discipline that provides the economy and financial system capacity to adjust to shocks and keeps its credit metrics consistent with a Aaa rating even in the event of such events materialising.
While the country's economy is exposed to a number of possible shocks, broad consensus among both major political parties on fiscal objectives and a proactive central bank that is vigilant to financial stability risks supports very high policy credibility and effectiveness that gives New Zealand's policymakers effective tools to shoulder downside scenarios.
WHAT COULD CHANGE THE RATING DOWN
As implied by the stable outlook, a negative rating action is not likely in the near term. However, New Zealand's Aaa rating could move down over the medium term if a large external or domestic shock, perhaps stemming from a natural disaster, a housing market correction or a sharp fall in global trade, were to result in a sustained upward trend in government debt that was not reversed in the following years. Such an outcome would imply diminished fiscal and institutional strength, as well as undermining the health of the banking system by damaging access to external finance.
GDP per capita (PPP basis, US$): 36,136 (2015 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.9% (2016 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.3% (2016 Actual)
Gen. Gov. Financial Balance/GDP: 0.1% (2016 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.7% (2016 Actual) (also known as External Balance)
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 22 March 2017, a rating committee was called to discuss the rating of the New Zealand, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
Matthew Circosta
Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
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Singapore 48623
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Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
© 2017 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S").
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3 Comments
More broadly, New Zealand's credit profile is characterised by external vulnerability risks as a result of its large reliance on external financing, and by banking sector risk related to elevated household debt. While we think that the likelihood of these risks crystallising is low, they are somewhat more elevated than corresponding risks in many other Aaa-rated sovereigns. (My emphasis)
Give it a rest.
*In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, itsimultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. Read more
*“In a barter economy, there can rarely be investment without prior saving. However, in a world where a private bank’s liabilities are widely accepted as a medium of exchange, banks can and do create both credit and money. They do this by making loans, or purchasing some other asset, and simply writing up both sides of their balance sheet.” Read more
*More importantly, the banking system does not simply transfer real resources, more or less efficiently, from one sector to another; it generates (nominal) purchasing power. Deposits are not endowments that precede loan formation; it is loans that create deposits. Money is not a “friction” but a necessary ingredient that improves over barter. And while the generation of purchasing power acts as oil for the economic machine, it can, in the process, open the door to instability, when combined with some of the previous elements. Working with better representations of monetary economies should help cast further light on the aggregate and sectoral distortions that arise in the real economy when credit creation becomes unanchored, poorly pinned down by loose perceptions of value and risks. Borio Page 17 of 38
*Demand deposits referred to by the public as “cash in bank” is recorded and reported by monetary financial institutions (MFI) in units of account by double entry bookkeeping in a process which the MFIs call “lending ” — but which is effectively a nullity — by debiting loans receivable and crediting demand deposits. Read more
*What banks do is to simply reclassify their accounts payable items arising from the act of lending as ‘customer deposits’, and the general public, when receiving payment in the form of a transfer of bank deposits, believes that a form of money had been paid into the bank. Read more
So basically we have a well run country that produces low wage, low value-add exports (dairy, tourism and education) that relies on immigration and external financing in order to elevate household debt.
Well run, that is from the point of view of Moody's masters - the US megabanks and their Aussie lick-spittles. It's not called neo-colonialism for nothing, now is it?
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