New Zealand's "chronic" current account deficit was putting pressure on its AA-plus sovereign credit rating, Standard & Poor's said today.
The international credit rating agency put out a statement after New Zealand posted a seasonally adjusted $4.1 billion deficit in the March quarter which swelled the annual deficit to $14.5b.The annual deficit is equivalent to 9.3 per cent of GDP and the worst since the first oil shock in 1975.
"At 9.3 per cent of GDP, Standard & Poor's regards the current account deficit as high and unsustainable, placing pressure on the AAA/Stable/A-1+ local currency and AA+/Stable/A-1+ foreign currency credit ratings on New Zealand."
Credit analyst Kyran Curry said that importantly, the Government had maintained a steady course of fiscal discipline, which had provided the vital buffer needed to mitigate the effects of the country's high external debt.
"The high external debt presents ongoing contingent risk to the Government. This relates to pressure the Government may face to assist borrowers if they suffer financial distress, as well as any wider impact on the economy from a major downturn in activity.
"Consequently, maintaining a strong fiscal position remains a critical factor underpinning the AA-plus foreign currency rating," Mr Curry said.
Surveys indicated the current account deficit could gradually narrow as the effects of the weaker New Zealand dollar stimulated export growth and trimmed the appetite for imports.
"This would be a welcome development, but New Zealand has a significant way to go before its current account deficit and foreign debt levels recede to more sustainable levels," Mr Curry said.
Finance Minister Michael Cullen said the today's figures underscored the "wisdom of the Government's fiscal strategy".
He said that higher oil prices had aggravated the goods balance, but there were some hopeful signs with the trend on goods flattening out.
"This should improve over the next year as the lower exchange rate boosts export returns," Dr Cullen said.
He said the National Party's "reckless" multi-billion dollar tax cuts would have aggravated the deficit while the policies of debt reduction, investing in infrastructure and building assets in the New Zealand Superannuation Fund assisted.
"It's why Standard & Poor's recently said we have the balance right, being one of the 'best placed' nations in the world to cope with future challenges."
