Debt behind double downgrade

Prime Minister John Key says the Government is not embarrassed by the downgrading of New Zealand's credit rating because it did not reflect a weak local economy. Photo / Stuart Munro

Standard and Poor's and Fitch downgraded New Zealand's sovereign debt ratings on Friday in what economists said was as much to do about turmoil on world financial markets as it was about the country's high level of debt.

Fitch downgraded New Zealand's foreign currency rating to AA from AA plus and S&P followed up with a cut to its long-term foreign currency ratings on New Zealand to AA from AA plus. S&P also cut its long-term local currency rating on New Zealand to AA plus from AAA.

Fitch said New Zealand's high net external indebtedness was a key vulnerability, particularly in a global environment that has remained volatile since the ratings were assigned a negative outlook in 2009. Both agencies highlighted New Zealand's current account - which measures the difference between what the country earns from the rest of the world through trade and investment and what the world earns from New Zealand - as a cause for concern.

Bank of New Zealand treasurer Tim Main said the rating moves served to highlight what he said was an 'international credit standoff'' as the European Union grappled with Greece's sovereign debt crisis and similar concerns with the other bigger EU members, such as Italy and Spain.

New Zealand remains in the club of advanced economies with high household indebtedness - around 150 per cent of household disposable income, similar to levels in Australia (157 per cent) and the UK (159 per cent), and above the US (116 per cent).

"Unlike the UK and US, New Zealand has seen no meaningful reduction in this ratio since 2008,'' Fitch said.

New Zealand's current account deficit represented 3.7 per cent of gross domestic product (GDP) in the year to June. Economists expect the shortfall to widen to around 5 to 6 per cent within two years - still well short of the deficits recorded in the years from 2004 to 2009, which saw it peak at 8.9 per cent of GDP.

Deutsche Bank NZ chief economist Darren Gibbs said New Zealand had in the past been able to get away with high current account deficits because funding markets were friendlier. "Given the highly stressed nature of financial markets today, the credit ratings agencies are taking a dimmer view on debt,'' he told APNZ.

"We can see what is happening in Europe with those countries that have debt that is viewed as being too high,'' he said.

Economists were quick to point out that the ratings remained favourable, relative to many other Western countries, particularly those in parts of Europe.

S&P had in the past warned of the danger of a widening current-account deficit that leaves the country increasingly dependent on foreign capital.

The market reaction on Friday afternoon to the downgrades in the interest rate markets was relatively mild, with bond yields gaining about 11 basis points across the curve.

The New Zealand dollar fell against all major crosses after the downgrades.

BNZ's Main said the government's forecast operating surplus for 2014/15 would help the ratings outlook, as would the trend towards households and corporates paying off debt.

And S&P said rising public savings will be an important component for keeping the country's current account deficit in check.

Upward pressure on the ratings could eventually emerge if sustained current account surpluses, led by a stronger export performance and higher public savings, markedly reduced external debt, it said.

Prime Minister John Key said the Government was not embarrassed by the downgrading of New Zealand's credit rating because it reflected global concern about debt, not a weak local economy.

At a press briefing in Auckland this afternoon Mr Key said the agencies were concerned about New Zealand's private sector debt, in particular how much of it was owed to foreigners.

"Those [debt] levels are high but ... we are starting to get on top of [them].

"The good news part of the story is that they've reaffirmed that the government is on the right track, that our books are in good shape, that we are a very solid country credit.''

Asked if the Government was embarrassed by the downgrade, Mr Key said: "No not all. The issue here is that the international environment is weak, there's nothing new about the level of debt, the external liabilities, they have been a problem ever since we have been in government and for the last, probably, ten years and that's why we were given a negative outlook.''

He said the indication from the banking sector was that the downgrade was not likely to have a major effect on New Zealanders in the short-term.

Mr Key reaffirmed that New Zealand was not immune from global crises.

We can't control what's happening in Europe and "the United States ... and the way to get on top of our private sector debt is to do what the government has been doing, and that is make sure the economy is competitive and efficient and export-focused.

"My advice from the treasury is that we are on track to be in surplus in three years.''

Finance Minister Bill English is sticking with the same economic approach, despite the double downgrade.

"The ratings news today reinforces the need for the Government to continue with its clear and balanced plan to get on top of that debt,'' Mr English said.

"That involves returning to surplus and exporting more to the rest of the world.''

Mr English said compared to other countries, New Zealand had come through the recession reasonably well.

"We're one of only 19 countries still rated AAA by Moody's and we're now the only highly-rated country with a two notch gap between our ratings with Moody's and Standard and Poor's.''

"This reflects our unusual position of having relatively low public debt, but large private sector external debt, built up over several decades,'' he said.

Mr English said it was unclear what the impact on interest rates would be.