New Zealand's credit rating downgraded

Last updated 08:28 30/09/2011

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Credit rating agency Standard & Poor's has cut New Zealand's rating from AA+ to AA, after a similar downgrade by rival agency Fitch this morning.

S&P has had New Zealand on negative outlook since late last year.

The downgrades reflect global concerns about foreign debt and New Zealand's high private sector debt, Finance Minister Bill English says.

The Government had focused on bringing New Zealand through the global economic crisis and the cost of the Canterbury earthquakes.

New Zealand's private savings had started to increase but still remained high, he said.

Compared to other countries New Zealand had come through the recession reasonably well and the downgrade reflected the "unusual position" of high private and low public debt.

S&P said it cut the rating because of the likelihood that New Zealand's external debt would get worse when the Government is having to spend more as a result of the Christchurch quake.

The new rating reflected S&P's opinion of the country's government spending and monetary policy flexibility, economic resilience and sound banking sector.

But those strengths were "moderated" by New Zealand's "very high external imbalances" with high household and farm sector debt, dependence on commodity prices and the pressures on government spending from an ageing population.

Big banks' credit profiles in New Zealand were expected to remain sound and for New Zealand to remain a core market for the big Australia banks.

The strength of the government's finances was also an important factor lessening the risks from high overall external debts.

Fitch Ratings cut the country's rating by one notch because of concern about growing external debt in a volatile global economy.

It lowered the rating to AA from AA+ and said it was unlikely New Zealand would be able to sustainably narrow its current account deficit over the next few years.

The Fitch move sent a message about the country's savings habits which cannot be ignored, fund manager Tower said.

Sam Stubbs, head of investment management at Tower, said it was another good argument for KiwiSaver to be made compulsory.

New Zealand was borrowing too much money from overseas and the ratings agencies would not feel comfortable until they saw a bigger pool of domestic savings.

''Their views cannot be dismissed.''

The simplest way to do this was to increase KiwiSaver contributions over time.

What was missing was a long term mutually agreed strategy on the superannuation scheme, so that all parties - employers, employees, governments - could plan ahead.

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''If it becomes a short term political football its contribution to things like what the ratings agencies think of us gets diminished.

''Saving is a habit and habits take time to develop.''

New Zealand's borrowing requirements would not change, but if it borrowed domestically it was in a far less vulnerable position, Stubbs said.

POLITICAL REACTION

Labour attacked the Government over the downgrade and said it was evidence of National's economic failure.

Party leader Phil Goff said it was a result of the Government borrowing to pay for its tax cuts and showed it had failed to make the hard decisions needed to fix the imbalances in the economy.

Comments by Prime Minister John Key about "muddling through" the latest turmoil on international financial markets were not good enough, he said.

Labour's finance spokesman David Cunliffe said Finance Minister Bill English did not convince Fitch, when he met the agency in Washington last week, that National had cohesive economic plan to control debt and promote growth and savings.

"National has decisively failed the standard it set itself that the primary objective of its budgets was to avoid the credit rating downgrade that happened this morning."

"Instead National has preferred to muddle through by closing its eyes to these structural issues and

Giving trickle-down tax cuts to the wealthy had worsened New Zealand's structural problems of high private debt and the widening current account deficit, he said.

"The knee-jerk, short-term response of SOE asset sales does not solve these problems and has not reassured Fitch."

The downgrade was a vote of no confidence in Key and his Government's policies, Green Party co-leader Russel Norman said.

He said a worsening outlook for the current account deficit was largely due to high levels of foreign ownership in New Zealand.

A recent jump in the deficit, to $7.2b, was due to dividends being paid overseas and explained the timing of the downgrade, he said.

"John Key's Government has failed to address the unsustainably high levels of overseas ownership of the New Zealand economy. In fact, their plans to sell state-owned companies will only make matters worse."

The downgrade recognised the "significant vulnerabilities" in the economy.

ACT Leader Don Brash said he had been saying for months New Zealand was too dependent on foreign borrowing.

The Government had not done enough to improve New Zealand's growth prospects or to cut back on Government spending and taxation.

"The Government has dropped the ball here."

WHAT TRIGGERED DOWNGRADE?

Westpac Bank said it was hard to know what "new" information led to the downgrade.

There has been speculation that the trigger was weaker than expected June quarter growth of just 0.1 per cent, combined with the higher costs estimates for the Canterbury earthquake.

However, Fitch noted the New Zealand rating was supported by "fiscal prudence" and government finances here were stronger than many countries.

But the higher costs of the Christchurch quake could set back the government's plan to return the books to surplus by 2014/15.

Fitch focussed on the risks from New Zealand's relatively high level of external debt. The current account deficit was expected to worsen to 4.9 per cent of gross domestic product next year and then to 5.5 per cent in 2013.

However, Westpac pointed out that Fitch expected in 2009 that New Zealand's net debt would hit 100 per cent of GDP this year, but in fact it has improved and is now about 70 per cent of GDP down from a peak of 85 per cent of GDP, with a temporary boost from insurance payouts for the Canterbury quake.

In theory, a lower credit rating will increase the cost of borrowing in New Zealand, pushing government bond rates up and leading to a lower New Zealand dollar.

Meanwhile, Deutsche Bank said the Fitch downgrade reflected concerns about high external debt levels, in the context of a recent global financial market turmoil.

International borrowing costs could rise by 5 to 10 basis points as a result of the downgrade, Deutsche Bank said, but that would be more for long-term borrowing.

New Zealand still remained highly rated and a sought after investment destination, with the government's Debt Management Office borrowing $1 billion just yesterday.

- © Fairfax NZ News

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