Fitch affirms New Zealand's 'AA' credit rating as govt continues to narrow deficit

Fitch Ratings has affirmed New Zealand's double-A credit rating, saying the government is still reining in its operating deficit with a "credible and flexible" economic policy and "supportive business environment."

The global rating agency affirmed the nation's 'AA' long-term foreign and 'AA+' local currency issuer default rating with a positive outlook, even as the Crown's books take longer to get back in black with tepid inflation slowing growth. New Zealand's central and local government debt at 35.7% of gross domestic product in 2014 was in line with the 'AA' median, and well below the 71.8% median across developed nations. The rating agency sees annual growth of 2.8% in 2015.

"Fitch expects high levels of net immigration, rebuilding efforts in Christchurch and construction activity in Auckland to continue supporting economic growth and facilitating further fiscal consolidation," primary analyst Mervyn Tang said in his report. "However, lower agricultural production due to drought, and weaker demand following a fall in dairy prices, has slowed New Zealand's economic momentum."

The Crown accounts for the 11 months ended May 31 are due for release today, and Prime Minister John Key said yesterday that they will show "quite a strong set of accounts." The government showed an unexpected operating surplus before gains and losses of $448 million in the 10-month period, after the Treasury projected an annual deficit of $684 million in the June financial year.

Slumping dairy prices and a deteriorating terms of trade prompted the Reserve Bank to cut interest rates last month, and pessimism in the agricultural sector and increased volatility in financial markets has stoked expectations governor Graeme Wheeler will reduce the official cash rate to 2.5% by the end of the year from its current 3.25% level.

The deteriorating outlook prompted ANZ Bank New Zealand economists to call for the government to loosen up the purse strings and adopt a neutral or expansionary fiscal setting to support the Reserve Bank's bias for lower interest rates.

Mr Key said yesterday the bank was ahead of itself and that, while the government was ready to support the economy, he didn't see the need for stimulus yet.

Fitch said it expects some recovery in dairy prices over the current season but that a prolonged period of low prices could be a substantial drag on the economy.

"Many leveraged dairy farmers are currently facing negative cashflows but have been able to manage their finances by drawing on savings from more profitable years and through overdraft facilities," it said. "However, another season of low dairy prices could find farmers struggling to make debt repayments and maintain production, especially combined with another shock such as poor weather."

The rating agency said a sharp downturn in Auckland's housing market is unlikely, though could pose a risk to the economy.

Fitch said the rating could be upgraded if central and local governments reduce their deficits and improve public debt ratios, and if the current account deficit becomes structurally narrower.

The rating agency sees the current account deficit widening to 5.4% of GDP as investment is spurred by building activity, outpacing growth in domestic savings.

(BusinessDesk)