S&P affirms credit rating on back of fiscal flexibility and resilient economy

New Zealand's foreign currency credit rating was affirmed at AA with a stable outlook by Standard & Poor's.

The ratings agency says the country enjoys monetary and fiscal flexibility and a resilient economy offsetting the risk of high external debt.

The short-term rating was affirmed at A-1+. The stable outlook reflects S&P's expectation that New Zealand's fiscal performance "will improve over the medium term, offsetting vulnerabilities associated with its high external debt."

"We believe the checks and balances in government are effective, and New Zealand ranks near the top of many surveys on governance, government efficiency, and business promotion," S&P says. 

"The Reserve Bank has strong credibility regarding its inflation mandate and its supervisory role."

The nation "benefits from a high-income and resilient economy, which we believe draws from decades of structural reforms and wage restraint," it said.

The Treasury is projecting a small budget deficit this year, as almost non-existent inflation and weak export commodity prices keep a check on tax revenue, before a return to surpluses starting in 2017.

Finance Minister Bill English said last month the government has an extra $3.5 billion of spending tagged for the next two years which it can phase in as needed, depending on the track of the economy, which grew at a faster than expected 0.9 % in the fourth quarter

S&P expects economic growth to slow to 2.7% by the end of June, down from 3.3% in the 2015 fiscal year. It cites the impact of weak dairy export prices and tailing-off of earthquake rebuilding work in Christchurch.

That is offset by record migration, which is driving household consumption and property investment.

It sees net general government debt peaking at about 25% of gross domestic product in 2018, higher than its previous forecast of 24% of GDP.

The ratings company is concerned about New Zealand's weakening external performance, which was likely to expand the nation's "already high" external debt net of official reserves and financial sector external assets to more than 200% of current account receipts, up from about 160% in 2015.

S&P forecasts the country's gross external financing needs will remain high at almost its current account receipts and reserves, although the associated risks will be somewhat mitigated by the depth of trading in the New Zealand dollar and the nation's exchange rate flexibility.

It notes the kiwi dollar is the 10^th most actively traded currency in the 2013 Bank for International Settlements' triennial survey of foreign exchange trading.

It says New Zealand's Australian-owned banks are likely to retain ready access to external markets. While low dairy prices and the possibility of a disruptive housing market correction posed risks to the banking sector, "we currently believe that these risks are manageable."

(BusinessDesk)