Economic risk in positive territory

S&P Global Ratings believes the risks facing New Zealand's financial system have stabilised.

S&P Global Ratings revised its risk trend on New Zealand to positive from stable after housing-related imbalances in the economy moderated.

"We are revising our economic risk trend to positive given our view that the risks facing New Zealand's financial system have stabilised. This reflects a slowdown in the rapid rate of growth in residential house prices and private sector credit extension as the credit cycle matures," the ratings company said.

However, "we do not expect an improvement in economic risk will impact our issuer or issue credits ratings on New Zealand bank and non-bank financial institutions," it said.

The key drivers in the slowdown of house prices and private sector credit growth are tighter bank lending standards and the macro-prudential tools implemented by the Reserve Bank of New Zealand.

It says Government policy initiatives may contribute to a continued slowdown.

The central bank sought to slow demand in the property market in recent years through loan-to-value ratio restrictions, first implemented in 2013. More recently, the Government banned the sale of residential property to foreign buyers under new rules that came into effect this month.

But S&P Global Ratings still believes the risk of a sharp correction in property prices remains elevated because of the historical build-up.

If a sharp correction were to occur, the New Zealand economy's external weaknesses, in particular its persistent current account deficits, would amplify the impact on financial institutions, it said.

It said there is potential for an easing of the economic risks the banking system faces if the four-year average growth of inflation-adjusted house prices remains below 8 per cent, and the four-year average growth of private sector debt to GDP remains below 2 per cent.

It also said the trend for industry risks in New Zealand's banking sector is stable.