Data Flash (New Zealand)
S Decision - NZ rating stays at AA+ with negative outlook
Key Facts
* S announced today that NZ's foreign currency credit rating will remain unchanged at AA+. The agency retained the
`negative outlook', which was introduced in September 1998.
* Moody's foreign currency rating for NZ is Aa2, which corresponds to AA on the S rating scale.
* S also affirmed its AAA long-term local currency rating, with a stable outlook.
* In support of the rating decision S quoted: - A low public sector debt burden, with net public external debt having fallen to 27% of exports - down from
75% in 1994. - Structural economic reforms, which have generated flexible product and labour markets. - An independent
central bank pursuing cautious monetary policies.
* New Zealand's rating was seen as being constrained by: - High private sector debt. - A high level of corporate sector
external debt (45% of GDP versus 30% in 1995).
* S argued that the magnitude of private sector leverage was reflected in persistent high current account deficits and that
it reflected a significant contingent liability to the sovereign.
* The reasons for maintaining the negative outlook are: - The risk that the Labour/Alliance Government will not meet its
target of keeping the budget in surplus over the cycle. - The risk that the Government's more interventionist
microeconomic stance will make the labour market less flexible and will depress growth prospects. - The risk that the
new Government's policies will impair the country's ability to attract overseas capital.
* S commented that a downgrade could occur if - the budget shifts into deficit; and/or - the government lends material
support to the private sector should there be any signs of financial distress.
* Given extensive comments by S over recent weeks that downplayed the importance of the current account in its ratings decision, the market had
increasingly factored in the possibility of an unchanged rating. As a result, the immediate NZD reaction was rather
muted - a 20 bps lift to 0.4980 against the USD.
* While we expect significant pressure for extra expenditure from within the Government ranks, the probability of the
fiscal balance recording a deficit over coming years has to be assessed as relatively low. In our view, the current
account deficit will remain the key risk surrounding the current rating. Following a peak of 8% of GDP in late 1999, we
do not expect the deficit to improve to below 6% over the next two years. That implies that foreign liabilities will be
built up at a faster rate than GDP, thereby exacerbating the adverse trends in private sector leverage referred to in
the S decision.
Ulf Schoefisch, Chief Economist, New Zealand,
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