S&P warning hits dollar

A warning from international credit rating agency Standard & Poor's over New Zealand's foreign currency rating sent the kiwi dollar to a four week low against its US counterpart this afternoon.

Standard & Poor's has revised its outlook on New Zealand's foreign currency rating from stable to negative, and is warning of a possible downgrade in the country's currency ratings if the next budget does not contain a credible medium-term fiscal plan.

The dollar fell to US56.45 cents from 57.17 cents immediately before S&P issued its report.

By 5pm, the kiwi was at US56.13c, down from US58.58c late yesterday afternoon. Against the Australian dollar, the kiwi fell to A83.07c from A84.50c.

"The outlook revision on the foreign currency rating is motivated by our view of New Zealand's narrowing economic policy flexibility in light of the country's widening external imbalances, as evidenced by the sizeable current account deficit," S&P primary credit analyst Kyran Curry said.

New Zealand's current account deficit was $15.5 billion, or 8.6 percent of gross domestic product, for the year to September 2008.

"Although we view projected fiscal deficits as not uncommon given the cyclical weakening of tax revenue and the countercyclical fiscal measures taken by the government, market confidence may wane until policymakers articulate a plan for medium-term fiscal consolidation," Curry added.

At the same time, S&P affirmed its 'AA+' foreign currency and 'AAA' local currency long-term ratings on New Zealand, as well as its 'A-1+' short-term ratings on New Zealand and the ratings on the country's debt issues.

Finance Minister Bill English said the current account deficit was likely to narrow somewhat in the next few years and that the government was committed to the kind of fiscal policy consolidation that Standard & Poor's referred to.

"Complacent policies and ill disciplined spending in recent years have increased New Zealand's vulnerability to the world recession. We have inherited an economy in recession, a large current account deficit, and sharply deteriorating government finances," English said.

"In that regard, any calls for further fiscal stimulus need to be weighed up against the consequences of taking on further debt," English added.

A Standard & Poor's long-term rating reflects a country's capacity to meet its financial commitments on a timely basis, with the AA+ rating representing a very strong capacity to meet financial commitments, and the AAA rating being the highest rating.

A short-term rating is an assessment of the likelihood of timely repayment of obligations considered short term in relevant markets, with the 'A-1+ rating representing the highest quality obligations.

Curry says New Zealand's next budget, the first from John Key's government, would be a key indicator of the government's intent regarding medium-term expenditure cuts and reprioritizing of policy initiatives.

S&P's corporate & government ratings division said a credible medium-term fiscal plan combined with an easing of New Zealand's external imbalances could result in the ratings stabilizing at the existing levels.

"Absent of such developments, the foreign currency rating could be lowered," Curry warned.

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