Credit downgrade: I didn't see it coming - English

Finance Minister Bill English said he spoke with Fitch Ratings people last week, but did not know they were about to downgrade New Zealand's credit rating. Photo / Mark Mitchell
Finance Minister Bill English said he spoke with Fitch Ratings people last week, but did not know they were about to downgrade New Zealand's credit rating. Photo / Mark Mitchell

Fitch ratings agency has lowered New Zealand's credit rating by one notch to "AA" and expressed concern over its high external debt.

"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 overnight.

The country's net external debt hit 70 per cent of annual gross domestic product (GDP) in June.

Fitch said New Zealand's current account deficit, which reflects a structural imbalance between savings and investment, is set to climb to 4.9 per cent of GDP next year and 5.5 per cent in 2013.

Fitch also downgraded by one notch New Zealand's local currency rating from the top "AAA" rating to "AA+".

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

"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," said Fitch.

Finance Minister Bill English met with representatives from Fitch last week in Washington, D.C.

"They didn't talk much specifically about New Zealand," English told Newstalk ZB.

"They made it clear they weren't going to tell us what their view was on the day, because were considering New Zealand's position."

English would not say he saw the downgrade was coming, but said Fitch are "going through a cycle, with a number of countries downgrade".

"We've always known what the issues are and that's why we've been working pretty hard over the last couple of years on getting the Government's debt under control, because that is an important part of this, but also trying to pull some of the indirect levers to influence our household debt."

English said Moody's and Standards & Poor's will also be assessing their ratings of countries.

Westpac chief economist Dominick Stephens said it was "difficult to know what new information provided the catalyst for Fitch to shift from negative outlook to take the decision to downgrade".

"There has been speculation that the trigger was the recent weaker than expected GDP print for the June quarter, combined with increased cost estimates for the Christchurch earthquake."

While Fitch's news release didn't point to this specifically, it did note that while New Zealand's ratings remain supported by "fiscal prudence", and public finances were typically a point of strength for New Zealand relative to its peers, upward revisions to the damage estimates from the Christchurch earthquake and consequent fiscal costs, or fiscal slippage driven by other causes, could set back the Government's current forecast of returning to budget surplus by 2014/15.

Stephens said the high net external indebtedness, in part due to low household savings, was viewed as the key vulnerability, particularly in the volatile global environment.

"But this has long been a theme of Fitch's. In its 2009 report which downgraded NZ's credit outlook to negative, it warned that net debt would be likely to rise above 100 per cent by 2011."

New Zealand's net international investment position had improved substantially in recent years, said Stephens and was now at 70 per cent of GDP, down from a revised peak of 85 per cent.

"Fitch is presumably sceptical about the extent of structural improvement in this outlook noting that "changing deep-seated behaviour is likely to be difficult" (in relation to domestic savings behaviour)."

Stephens said that theoretically a lower credit rating would increase the cost of funds for the New Zealand economy and the New Zealand government.

- AFP/ NZ HERALD STAFF

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