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Press Release: S&PGR Affirms New Zealand Ratings; Outlook Stable

30 Jan 2018 5:19 am
The following is a press release from Standard & Poor's: 
     -- New Zealand has monetary and fiscal flexibility, a resilient economy, 
and institutions conducive to swift and decisive policy actions. The high 
level of external liabilities is New Zealand's main credit weakness. 
     -- We are affirming our 'AA/A-1+' foreign currency and 'AA+/A-1+' local 
currency sovereign credit ratings on New Zealand. 
     -- The rating outlook remains stable, reflecting our expectation New 
Zealand's key credit metrics will remain near current levels in the next two 
On Jan. 30, 2018, S&P Global Ratings affirmed its 'AA' foreign currency and 
'AA+' local currency long-term sovereign credit ratings on New Zealand. We 
also affirmed the 'A-1+' short-term rating and maintained our transfer and 
convertibility risk assessment on New Zealand at 'AAA'. The rating outlook 
remains stable. 
The stable outlook reflects our expectations that New Zealand's fiscal 
performance will remain sound with a slowly improving net debt ratio during 
the next few years. This provides the country with flexibility to offset risks 
associated with its high levels of external debt, and its high private-sector 
debt that could present risks to the stability of its financial system. 
The most likely scenario for an upgrade would be if New Zealand's general 
government budget performance improves in a sustained way, enhancing the 
resilience to macroeconomic or financial sector risks caused by high levels of 
external and domestic leverage. 
We could lower our ratings on New Zealand if its fiscal performance, debt 
profile, or banking metrics weakened substantially compared with our current 
The ratings on New Zealand reflect the country's monetary and fiscal policy 
flexibility, economic resilience, and public policy stability. These strengths 
provide the country with flexibility to offset potential risks related to its 
large external imbalances, high household and agriculture sector debt, 
dependence on commodity income, and financial system stability. 
--Institutional and Economic Profile: Newly elected government likely to 
pursue expansionary fiscal policy; institutions and economy underpin rating-- 
     -- Institutions underpinning the rating will remain strong and stable 
following the election of a new government. 
     -- The economy is wealthy and resilient, reflecting decades of structural 
New Zealand's stable institutions support its ratings with effective checks 
and balances. Further, New Zealand ranks near the top of many surveys on 
governance, government efficiency, and business promotion. A new center-left, 
Labour government, elected in October 2017, is likely to pursue more 
expansionary fiscal policy than the previous government. We have incorporated 
these expected new policies in our economic and financial assumptions. 
New Zealand benefits from an open, prosperous, flexible, and resilient 
economy, which draws from decades of structural reforms. We forecast real 
economic growth to be robust at 2.8% per year between 2018 and 2020, driven by 
low interest rates, population growth, and higher government spending. Because 
of strong population growth, real GDP growth per capita will be less, at about 
1.4% per year on a per capita basis during this period. GDP per capita was 
about US$41,000 as of June 30, 2017, and economic growth has been solid during 
the past few years at more than 3%, despite global and domestic challenges. 
The composition of growth will likely change in light of the policies to be 
rolled out by the newly elected government. We expect higher government 
spending to contribute to a greater proportion of growth. Consumption growth 
and business investment are also likely to remain firm. We believe that 
credit-growth is playing a diminishing role as a driver of economic growth. 
Even though the property market is softening after a strong period of growth, 
we still expect residential investment to remain solid, supported by net 
migration and government policies such as Kiwibuild. The government plans to 
construct 100,000 affordable homes in the next decade through its Kiwibuild 
program. Ongoing residential investment and the new government's housing 
policies could alleviate housing supply pressures over time. Risks stemming 
from rising property prices and household debt appear to have stabilized in 
2017, but it will take some time before the risks to economic and financial 
stability subside. 
Recent financial history in other developed markets confirms that rapid credit 
growth can lead to vulnerabilities in to financial, fiscal, and economic 
stability if a dynamic expansion experiences a sudden and unexpected slowdown. 
Along with strong population growth, New Zealand's free-floating exchange 
rate, which has depreciated sharply since mid-2014, is helping to sustain 
solid economic growth. Services exports, especially tourism, have become an 
important contributor to growth, and are helping diversify the country's 
exports. The agriculture sector, especially dairy, remains the key export of 
New Zealand. 
--Flexibility and Performance Profile: Solid fiscal and debt profiles offset 
high external imbalances-- 
     -- Solid fiscal performance is improving the nation's debt profile. 
     -- New government's expansionary policies are partly funded through the 
cancellation of tax cuts and will not materially weaken the budget outlook. 
     -- Large external imbalances remain a key risk, reflecting New Zealand's 
reliance on foreign funding and a history of current account deficits. 
Our ratings reflect solid fiscal performance and our expectation that higher 
government spending will not materially weaken the country's fiscal profile. 
We forecast the change in net debt will average about 0.3% of GDP between 2018 
and 2020, down from about 1.6% between 2014 and 2016. It was 0.5% of GDP in 
2017. New spending measures, including more generous welfare, education, and 
housing policies, are partly funded through the cancellation of the previous 
government's proposed personal income tax cuts. As such, we do not expect the 
measures to materially affect the government's fiscal positon. The former 
government made substantial headway in improving its fiscal performance since 
the negative effects of the 2008 global recession and 2010-2011 Canterbury 
earthquakes, when the general government sector fiscal deficit peaked at 7.4% 
of GDP and net debt increased by 9.1% of GDP. 
With this outlook and solid economic growth forecast, we expect net general 
government sector debt to improve and decline to about 17% of GDP in 2018, 
with interest expenses of less than 5% of revenues. Lower interest expenses 
than previous forecasts reflect changes in data sources from Statistics New 
Zealand rather than lower interest rates. 
Meanwhile, New Zealand's external imbalances remain the key risk to our 
rating. We forecast current account deficits to widen in 2019, after narrowing 
in briefly in 2018, and be in line with historic levels of about 3% of GDP as 
imports outpace exports. While such deficits are not out of the ordinary for 
New Zealand from a historical perspective, they are high as a proportion of 
current account receipts at about 10% per year between 2019 and 2021. 
With current account deficits in this range, we expect the economy's external 
debt--net of official reserves and financial sector external assets--to remain 
very high compared with peers and be broadly stable, at about 185% of current 
account receipts, during the next few years, before decreasing slightly. 
In addition, there is a large market for nonresident offshore issuance in New 
Zealand dollars that affects the demand for New Zealand dollars. This market 
accounts for nearly 60% of New Zealand's annual current account receipts. 
Further, nearly half of nonresident onshore issuance--Kauri bonds, which 
amount to NZ$27 billion, or about 45% of current account receipts--is held by 
nonresidents. These markets contribute to the liquidity of the New 
Zealand-dollar foreign-exchange market, but by the same token could exacerbate 
a currency correction if offshore demand were to fall. 
The broad measure of net external liabilities as a share of current account 
receipts in new Zealand is among the highest in the OECD, surpassed only by 
Turkey, Australia, the U.S., and Greece, underlining continuous and 
significant external vulnerabilities (see "Sovereign Risk Indicators," Dec. 
14, 2017; an interactive free-of-charge version is available at 
We also forecast New Zealand's gross external financing needs to remain very 
high compared with peers, at about 195% of the nation's current account 
receipts and reserves. However, somewhat mitigating these risks are the depth 
of the New Zealand dollar foreign-exchange market and its exchange-rate 
flexibility. The 'Kiwi' is ranked 10th of actively traded currencies in the 
2016 Bank for International Settlements' triennial survey of foreign-exchange 
New Zealand's current account deficits are traditionally associated with 
external borrowings by its banks to fund its growth. The parent companies of 
the four major banks in New Zealand are headquartered in Australia. Our 
ratings on the four major New Zealand banks are equalized with those on their 
Australian parents, given our view that they are core parts of their parents' 
groups. Our ratings on these Australian banking groups face downward pressure 
during the next two years from the negative outlook on our sovereign rating on 
Australia as well as downward pressures that could emerge from the 
government's supportiveness toward the Australian banking sector (see "Ratings 
On 23 Australian Financial Institutions Lowered On Buildup Of Economic 
Imbalances," published May 21, 2017). A lowering of our ratings on the 
Australian major banks would have a flow-on effect on our ratings on the 

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