Bangkok--20 May--Moody's
Moody's Investors Service says that the New Zealand government budget presented on May 19 shows future deficit and debt levels that remain supportive of the government's Aaa bond rating and stable outlook.
Government finance is being challenged by the costs and reduced revenues related to the two earthquakes that struck the South Island, related insurance industry costs, and other one-time factors. As a result, the current fiscal year will see a record deficit of 8% of GDP, about one quarter of which can be attributed to the earthquakes. Furthermore, government revenues are being affected by lower economic activity during 2011.
To offset the lower revenue base going forward, the government budget proposes a number of expenditure measures that will return the operating budget to balance in the 2013-14 fiscal year and a small surplus in the following year. These out-year results are somewhat better than projected last December as a result of the measures taken, which include reduced government contribution to the Kiwisaver plan and other steps to control costs in social welfare and government spending generally. According to the budget plan, overall expenditures will fall as a percentage of GDP during the forecast period.
On the revenue side, selling of partial stakes in government controlled electric utilities and Air New Zealand are also proposed after 2011.
Moody's believes that the elimination of the deficit and the resultant debt trajectory, which shows gross central government debt peaking at 38% of GDP before beginning to decline, are compatible with the current government rating. In relation to the average for other Aaa-rated sovereigns, New Zealand's government debt levels remain on the low side.
Moody's also notes that, while temporarily alleviated by the economic slowdown, the country's dependence on foreign saving remains a vulnerability. In the short term, borrowing conditions for the government are favorable, given the desire of some global investors to diversify their portfolios away from European and US assets. In addition, while household debt related to housing has been a major factor in the external borrowing by New Zealand banks, this should be less important in the coming few years as the composition of investment shifts away from housing to other sectors.
As always, New Zealand's economic outlook is also related to commodity prices, which are at very high levels, and the assumption underlying the budget is that they will remain so, even if declining somewhat. Moody's believes that demand for New Zealand's commodities is likely to remain relatively strong, given the East Asian economic outlook, but also notes that this remains another potential vulnerability to the outlook.