Most of New Zealand's local and regional governments are likely to have rising infrastructure budgets over the next decade, which could erode "headroom" at their current credit rating levels, S&P Global Ratings said.
The councils are scheduled to publish their 2021-2031 long-term plans later this year, and they will likely roll infrastructure backlogs from the fiscal 2020 year into the upcoming years, the ratings agency said.
"Despite the likely increase in infrastructure expenditure, we recognize councils typically spend below their plans due to capacity constraints, ambitious planning, and lengthy approval processes," S&P Global Ratings credit analyst Rebecca Hrvatin said in a report.
Local councils' credit quality, meanwhile, remained favourable and the nation's economy and fiscal outcomes were rebounding quickly in the wake of the Covid-19 pandemic, S&P said.
"We believe there's more uncertainty than usual over the extent to which councils will deliver the budgets they propose in their upcoming 2021-2031 long-term plans, especially future infrastructure requirements," she said.
"This is because proposed reforms to water supply, stormwater, and wastewater could reshape the landscape of some councils."
The Government has proposed shifting water supply, wastewater, and stormwater responsibilities from councils to other entities.
S&P said capacity constraints will stall some of the infrastructure plans because all levels of government are rapidly increasing their infrastructure expectations.
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New Zealand local authority ratings are high and on a par with local authorities in Australia and Canada, but slightly below Sweden's.
Water and roading feature strongly on most council's spending plans.
S&P said credit quality had increased for the 24 New Zealand councils that the agency rates.
Fiscal management and flexibility helped councils recover quickly from the Covid-19 pandemic.
In February, S&P raised its ratings on the New Zealand sovereign, six local councils, and five government-related entities because the country was recovering faster than most other advanced economies from Covid-19.
The positive outlooks on Western Bay of Plenty and South Taranaki district councils reflected the councils' declining or stabilising debt levels, narrowing after-capital deficits, and improving financial management.
"The negative outlooks on Hastings and Tasman district councils reflect the risk that large deficits could be prolonged, leading to weaker liquidity and higher debt than we currently expect," S&P said.