Standard and Poor's: NZ stable but in debt

MONEY TROUBLE: New Zealand's overseas debt has kept it's rating from improving.
MONEY TROUBLE: New Zealand's overseas debt has kept it's rating from improving.

Ratings agency Standard and Poor's reaffirmed New Zealand's AA rating with a stable outlook on Friday, but warned there might be renewed pressure if the country's external debt levels were to deteriorate further.

A year after S&P cut New Zealand's ratings a notch, it said the current level was appropriate given the economy's outlook, fiscal strength, and the strength of its banks, which countered the threats from high external debt and vulnerable commodity markets.

''The stable outlook balances the stabilisation we expect between the government's debt profile over the medium term and the risks associated with the country's high external debt,'' said S&P sovereign analyst Kyran Curry.

He said the government's finances had been hit by the global slowdown and the costs of the February 2011 earthquake which hit the second biggest city, Christchurch, exacerbated the impact of a domestic recession.

The government's finances, which have been in deficit since 2009, were expected to return to surplus in 2015, as forecast in the May budget, with the debt burden peaking around that time before heading lower.

The centre-right government has made a return to budget surplus by 2014/15 an economic and political priority, and in May unveiled a budget with no new spending, cost cutting, asset sales and moves to close tax loopholes.

Finance Minister Bill English said the S&P statement backed the government's tight fiscal management.

''This...confirms New Zealand is heading in the right direction - and it is better placed than many other countries,'' he said in a statement.Financial markets were unmoved by the S&P statement.

But S&P said New Zealand's high external debt levels, much of which is private bank borrowing, would weigh on the economy, and if it were to worsen could prompt investors to shift out of NZ dollar assets, and put pressure on ratings.

''Downward pressure on the New Zealand ratings could emerge if New Zealand's external position continues to deteriorate,'' Curry said, adding that higher public savings were needed to keep the country's current account deficit under control.

It noted that households were cutting their debt and saving more, and an independent monetary policy and floating currency, as well as the position of the mainly Australian owned local banks, which are among the world's strongest, were positives.

New Zealand's current account deficit widened to 4.8 percent of GDP in the year to March 31, as the trade surplus narrowed, and is expected to worsen as the economy gains momentum, stoking import demand and delivering higher profits to foreign investors.

Conversely the country's ratings might be eventually boosted by current account surpluses, higher export earnings, reduced debt, and higher public savings.Last September, Standard & Poor's and Fitch cut New Zealand's ranking by one notch within hours of each other over concerns about its growing foreign debt.

The third major agency Moody's has left New Zealand as one of only nine AAA-rated economies.

The central bank has held its key rate at a record low 2.5 percent since April last year, as the economy shows modest and uneven growth, inflation pressures are benign and the global outlook uncertain.

A Reuters poll of analysts expects the next rate move to be a modest rise starting in the first half of next year.

- Reuters