Below find Fitch’s reasoning for this morning’s downgrade of New Zealand. Let’s not get too cocky with our Kiwi neighbours. So far as I can tell, if China were so slow for an extened period, you could pretty much substitute Australia for New Zealand in every single sentence.
Fitch Ratings-Hong Kong-29 September 2011: Fitch Ratings has downgraded New Zealand’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA’ from ‘AA+’, and Long-Term Local-Currency IDR to ‘AA+’ from ‘AAA’. The Outlook on both ratings is Stable. The Country Ceiling has been affirmed at ‘AAA’, and the Short-Term Foreign-Currency IDR at ‘F1+’.
New Zealand’s high level of net external debt is an outlier among rated peers – a key vulnerability that is likely to persist as the current account deficit is projected to widen again, reflecting a structural savings/investment imbalance,” said Andrew Colquhoun, Fitch’s Head of Asia-Pacific Sovereigns. “Nonetheless, New Zealand remains well placed among the world’s highly-rated sovereign credits, with its creditworthiness supported by moderate public indebtedness, fiscal prudence, and strong public institutions.”
New Zealand’s net external debt of 83% of GDP on a USD basis (78% in NZD terms) by end-2010 was well above the 10% median for ‘AA’ range credits, but had reached 70% of GDP in NZD terms by June 2011. The economy’s high net external indebtedness reflects a persistent current account deficit, peaking at 8.9% of GDP in 2008. The deficit corrected sharply amid recession in 2009-2010, but Fitch projects it will widen again to 4.9% in 2012 and 5.5% in 2013 as domestic demand recovers. Fitch views New Zealand’s high net external indebtedness as a key vulnerability, particularly in a global environment that has remained volatile since the ratings were assigned a Negative Outlook in 2009.
The downgrade partly reflects Fitch’s view that the sustained shift in the domestic savings/investment ratio required to narrow the deficit sustainably is unlikely within the forecast period. New Zealand remains in the club of advanced economies with high household indebtedness – around 150% of household disposable income, similar to levels in Australia (157%) and the UK (159%), and above the US (116%). Unlike the UK and US, New Zealand has seen no meaningful reduction in this ratio since 2008. Fitch acknowledges that the government has implemented policies designed to facilitate a shift in savings, including raising KiwiSaver contribution rates, but the agency cautions that changing deep-seated behaviour is likely to be difficult.
While a sustained strengthening in household savings could address New Zealand’s external indebtedness, such a development – even if it emerged – could make for a period of weaker growth, unless accompanied by renewed structural reforms. Historical experience shows that private consumption growth in New Zealand has been well-correlated with house price moves. The economy’s five-year-average real GDP growth rate of 0.7% compares unfavourably with median average growth rates of 1.1% and 1.4% for ‘AA’ and ‘AAA’ range credits, respectively. Adding to risks over the medium-term outlook, official data indicates that the productivity performance of New Zealand’s economy weakened over the 2000s. Average incomes remain moderate by ‘AA’ standards and even further below the ‘AAA’ median.
Public finances have traditionally been a rating strength for New Zealand relative to ‘AA’ rated peers but the deterioration experienced over the past three years has eroded that strength. The debt/GDP ratio of 46% in 2011, although below the ‘AAA’ median of 57%, is similar to the ‘AA’ median of 43% and the ratio of debt-to-revenues has risen in line with the ‘AA’ rating median to 122%. The general government revenue-to-GDP ratio has also become more volatile at 4.9% compared to the ‘AA’ rating median of 3.9%. Additionally, as non-residents hold more than half of New Zealand’s marketable government debt, the sovereign’s own funding conditions may not be isolated from any materialisation of risks in external finances, although Fitch stresses that the risk of such a downside scenario remains remote despite the downgrade.
A sharper than expected rebalancing of New Zealand’s economy leading to a reduction in the current account deficit and sustained falls in net external indebtedness nearer the norms for highly-rated sovereigns would benefit the ratings. New Zealand’s ratings remain supported by fiscal prudence, with the government hoping to return to budget surplus in FY2014/15. However, upwards revisions to damage estimates from the Christchurch earthquake and consequent additional fiscal costs, or fiscal slippage driven by other causes, could set back this timetable.