What will Cyclone Gabrielle do to NZ’s credit rating?

Ratings agency S&P Global says New Zealand can aborb the substantial costs incurred by Cyclone Gabrielle, provided such costs are temporary.

“At the current sovereign ratings, we believe there is headroom for New Zealand to absorb costs associated with responding to and recovering from Cyclone Gabrielle,” Melbourne-based Martin Foo, a sovereign analyst at S&P Global Ratings, said.

“This is provided such costs are temporary, relatively targeted, and do not fuel prolonged inflation or a structural deterioration of fiscal outcomes,” Foo said in comments supplied to the Herald.

He noted New Zealand already faced capacity constraints and skills shortages.

“This means the reconstruction effort is likely to draw resources away from or cause delays in other infrastructure projects,” he said.

“This will, perhaps counterintuitively, lessen the whole-of-government fiscal impact.”

S&P expects to have clearer information to form an opinion after the Government releases its next Budget, and once a more detailed assessment of the damages becomes available.

Foo said there could potentially be some rating impact for local councils that bear the brunt of the damage.

“We expect much of the costs of repairing local infrastructure to be recoverable through Crown natural disaster support, insurance or NZ Transport Authority subsidies.”

The impact of Cyclone Gabrielle has been compared to the Christchurch earthquakes of 2011, which is estimated to have cost $13 billion, including insurance.

That disaster contributed to S&P’s downgrade of the New Zealand sovereign debt to “AA” from “AA+”, but Foo said there were several other contributing factors, including concurrent weakening in New Zealand’s external position, at the time.

S&P currently rates New Zealand sovereign debt at “AA+/Stable”.

BNZ head of research, Stephen Toplis, said that while the cost to Government will be substantial, the impact on the Crown accounts needed to be put into context.

“Every one billion dollars the Government needs to borrow will add 0.27 per cent to debt as a percentage of GDP,” Toplis said.

“If, say, another $20 billion was needed, which is unlikely, this might take the peak in the net debt track to closer to 27 per cent than the 21.4 per cent currently forecast,” he said in a commentary.

“The point is that the Government balance sheet can handle a significant shock while still leaving New Zealand’s net debt position looking very credible by international comparison,” Toplis said.