Ratings agency S&P gives its verdict on New Zealand economy

Ratings agency S&P Global has issued a favourable report on New Zealand, before the October 14 election. Photo / 123rf

With just over a month to go before the election, ratings agency S&P Global has given a favourable report card on the state of play with the New Zealand economy.

The agency said it expects New Zealand’s fiscal deficit to narrow over the next three years as Covid-19-related temporary spending measures come to an end.

“Net general government debt will stabilise at a level that is modest compared with that of most highly rated sovereign peers,” S&P said in its latest assessment.

The Treasury’s state-of-the-nation, pre-election economic and fiscal update (PREFU), is due out tomorrow.

S&P, in its report, noted that New Zealand had tipped into recession early this year, and that higher interest rates would dampen growth.

However, S&P said it could lower its rating on the country if the fiscal deficit does not narrow, or if the current account deficit deteriorated further.

Recent data from Stats NZ showed the deficit reached 8.5 per cent of GDP in the March year.

“New Zealand’s monetary policy flexibility, wealthy economy, and institutions that are conducive to swift and decisive policy action offset weaknesses associated with the country’s large external imbalances,” S&P said.

The agency affirmed its “AA+/A-1+” foreign- and “AAA/A-1+” local-currency sovereign credit ratings on New Zealand, adding the long-term rating outlook was stable.

S&P’s “upside scenario” was based on any strengthening of the country’s fiscal metrics.

“Indications of this strengthening would include the general government deficit contracting to less than 3 per cent of GDP, and net general government debt or interest expenses falling on a structural basis to less than 30 per cent of GDP and 5 per cent of government revenues, respectively,” it said.

New Zealand’s economy had entered a technical recession on the back of aggressive monetary tightening.

New spending by the government and a slowdown in tax collections would delay, but not derail, the path of gradual fiscal deficit reduction, it said.

S&P real GDP growth will slow to just 0.2 per cent in fiscal 2024 and average about 2.5 per cent per year over subsequent years.

The Reserve Bank of New Zealand lifted its policy rate by 525 basis points between October 2021 and May 2023, translating into a significantly higher debt-servicing burden on households and businesses, and dampening domestic spending.

S&P expected higher interest rates to support an orderly unwinding of property prices.

The agency said the residential property market “appears to have bottomed out”, after prices slumped roughly 18 per cent from their peak in November 2021.

This came after rapid appreciation of more than 30 per cent in the preceding two years.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.