Bangkok--26 Aug--Standard & Poor's
RATING ACTION
On Aug. 26, 2014, Standard & Poor's Ratings Services affirmed its 'AA' foreigncurrency long-term rating and 'AA+' local currency long-term rating on NewZealand. We also affirmed the local and foreign currency short-term ratings at'A-1+'. The rating outlook remains stable. The Transfer & Convertibility
assessment remains 'AAA'.
RATIONALE
The ratings on New Zealand reflect the country's fiscal and monetary policyflexibility, economic resilience, public policy stability, and sound financialsector. Moderating these strengths are New Zealand's very high externalimbalances, along with its high household and agriculture sector debt; and
dependence on commodity income.
New Zealand's fiscal performance is gradually improving, following thenegative impacts of the global recession and the 2010-2011 Canterburyearthquakes. The general government cash deficit peaked at 7% of GDP in fiscal2011, and has improved to a deficit of 2.5% of GDP in fiscal 2014. We expectthe central government--regardless of which party is in power--to continue toimprove budget performance over coming years. We therefore expect net generalgovernment debt to peak at about 24% of GDP in fiscal 2016 before graduallydeclining, and the debt-servicing burden to remain moderate; this is similarto our expectations a year ago. Robust economic growth will continue tosupport fiscal consolidation.
New Zealand benefits from a high-income and resilient economy, with 2013 percapita GDP of about US$39,000. We believe this resilience draws from decadesof structural reforms and wage restraint. We expect real GDP per capita togrow at about 1.5% per annum over the next few years, in line with ourforecasts about a year ago. Partly driving growth will be the post-earthquakereconstruction activity in Christchurch. Low interest rates and strongunderlying demand will also support residential construction, particularly inAuckland, which may also underpin related consumer spending. The strongcurrency continues to weigh on trade-exposed sectors, although we expect it todepreciate over the forecast period, particularly as U.S. monetary policynormalizes.
While we anticipate favorable economic performance over coming years, thereare risks to New Zealand's growth outlook and credit quality. These stemlargely from the country's strong and growing links with China's economy. Ifdemand for New Zealand's key exports were to weaken sharply, the country'seconomic growth would slow, unemployment rise, and property values fall.However, New Zealand's policy and exchange rate flexibility would likelycushion the impact significantly.
A weaker currency should boost the country's international competitivenessover the forecast horizon, but we nonetheless continue to expect wideningcurrent account deficits over coming years. We expect strong import demand andrising net income deficits will be the main drivers of deterioratingperformance. Commodity export volumes will likely continue to grow, but theterms of trade may fall further from their recent peak. We forecast thecurrent account deficit to widen from its cyclical low of about 3% of GDP in2014 to more than 6% of GDP by 2017, and to remain above 10% of current
account receipts over this period.
Weakening external performance will further increase the economy's externaldebt--net of official reserves and financial sector external assets--from anestimated 250% of current account receipts in 2013. This ratio is among thehighest for rated sovereigns. In addition, there is a large market for
nonresident offshore issuance in New Zealand dollars (the Kauri, Eurokiwi, andUridashi markets), which affects the demand for New Zealand dollars. Thismarket totaled about 16% of New Zealand's GDP at March 2014. It contributes tothe liquidity of the New Zealand-dollar foreign exchange market, but by the
same token could exacerbate a currency correction if offshore demand falls.
We also forecast New Zealand's gross external financing needs to remain overtwice the level of its current account receipts plus reserves. However, thedepth of the New Zealand dollar foreign exchange market helps externalborrowers to access international markets; the 'Kiwi' is ranked 10th of
actively traded currencies in the 2013 Bank for International Settlements'triennial survey of foreign exchange trading.
New Zealand's current account deficits are traditionally associated withexternal borrowings by its banks. The parent companies of the four major banksare headquartered in Australia, and the Australian banking system, in turn, ishighly reliant on external funding. The possibility that foreign investorsbecome less willing to fund banks at reasonable interest rates poses a risk to
the banking system, the broader economy and, in turn, government finances.However, we believe that these banks will retain ready access to externalmarkets, as evidenced by our BICRA score of '3' (see "Banking Industry CountryRisk Assessment: New Zealand" published on RatingsDirect, Sept. 26, 2013.)
Underpinning the ratings on New Zealand are its strong institutions. Webelieve that the checks and balances in government are effective, and NewZealand ranks near the top of many surveys on governance, governmentefficiency, and business promotion. The Reserve Bank of New Zealand (RBNZ) hasstrong credibility regarding its inflation mandate and its supervisory role.
We have maintained a one-notch distinction between the long-term foreigncurrency and local currency ratings in light of the credibility of itsmonetary policy, the freely floating currency, and the depth of domestic debtmarkets. Monetary flexibility can underpin a sovereign's greaterdebt-servicing flexibility in its own currency.
OUTLOOK
The stable outlook balances the stabilization we expect between thegovernment's debt profile over the medium term and the risks associated withthe country's high and rising external debt. The outlook is premised on ourexpectation that New Zealand's financial system will remain sound and its
government finances robust.
Downward pressure on the New Zealand ratings could emerge if New Zealand'sexternal position deteriorates beyond our current expectations. On the otherhand, upward pressure on the ratings could eventually emerge if strongerexport performance and higher public savings markedly reduced external debt.