Kiwi dollar falls after Fitch cuts NZ credit rating

The New Zealand dollar slid below US77c this morning after ratings agency Fitch downgraded this country’s credit rating amid concern over high external debt.

Fitch, one of the three big credit ratings agencies, cut New Zealand’s long-term local rating one notch from AA+ to AA and its foreign currency rating from the top AAA to AA+.

It said the outlook in both ratings is stable and the overall country ceiling sits at AAA.

“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," Andrew Colquhoun, Fitch's head of Asia-Pacific sovereigns said in a statement.

"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."

The kiwi fell on the news, recently trading at US76.66 cents, down from US77.73 cents yesterday.Fitch said New Zealand’s debt is likely to persist as the current account deficit is set to climb to 4.9% of GDP next year and 5.5% in 2013.

The agency noted that New Zealand had one of the highest levels of household indebtedness among developed countries at 150% of disposable revenue, which hasn't declined significantly since 2008.

Finance Minister Bill English told One News the rating cut reflected the global situation rather than New Zealand's own financial position."Why it's happened is that despite the fact New Zealand has got itself in better shape since 2008, we've got our government debt under control and our households have started saving more and paying off debt, the financial markets have become more sensitive to debt," Mr English said.

"They're getting more worried about it and in a sense the goal posts have shifted.

"In our case the problem they have put their finger on is the same one they have talked about for a number of years .... all ratings agencies... that we have a high level of private sector debt and their view is it's not dropping fast enough."

Fitch said New Zealand's net external debt of 83% of GDP on a US dollar 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 NZ dollar 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. Damage estimates from the Christchurch earthquake and consequent additional fiscal costs, or fiscal slippage driven by other causes, could set back this timetable."