New Zealand is “clearly on notice” after a second international rating agency downgraded the country’s financial outlook to negative, an economist says.
Infometrics’ principal economist Brad Olsen warned that Nicola Willis’ Budget next month was not “going to look great” and believed the country’s much-promised return to surplus could be pushed out by another year.
While affirming New Zealand’s Aaa credit rating, rating agency Moody’s shifted its financial outlook for the country to negative because of the risks posed by global economic and geopolitical uncertainty.
“Inflation pressures also persist, including fuel price increases, stubborn non-tradeable housing costs and utility prices, and higher electricity costs,” the agency said in its report late yesterday.
In March ratings agency Fitch also downgraded New Zealand’s outlook from stable to negative, citing debt reduction concerns.
“The outlook revision reflects our view that a substantial debt reduction is becoming more difficult to envisage, as fiscal consolidation has been delayed in the past few years,” Fitch wrote.
Reacting to Moody’s outlook downgrade, Olsen told Ryan Bridge TODAY that New Zealand was “clearly on notice”.
“We’ve had higher inflation in recent times, we’ve of course got expectations that interest rates might have to increase, and the Government’s finances are unlikely to look better after the Iran war that we’re currently seeing. And so Moody’s have looked at all of that and said, well, all of those conditions make it quite difficult for the Government to remain on track to pay down debt, to get things back to surplus,” Olsen said.
“They’ve already seen a couple of years where that sort of debt repayment and surplus return have been pushed out and pushed out and pushed out, and they’re going, surely if you’ve continued to push them out and now got another shock, it can’t look good,” Olsen said.
“So risks [are] there around just how long we’re taking to return to surplus, but some very difficult conversations for the government. They’ll be looking at these sort of international ratings agencies and certainly not feeling comfortable, but equally there’s not a lot of easy options out of this sort of mix.”
Olsen was not sure whether Moody’s had made similar assessments of other countries yet.
“If everyone else gets downgraded around you, then you might be paying a bit more, but so is everyone. That’ll just be part of the global economic cycle. If New Zealand is being singled out a bit more in terms of how long it’s taking us to repay debt and everything else, that’s where you start to get worried that ... our financial positioning, how we’re regarded internationally, is falling back. And I think that’s why it was interesting in this Moody’s release, they said quite clearly, look, institutions in New Zealand are still good, they’re still solid. We’re just worried about how long things are sort of pushing out.“
Olsen was of the view that in next month’s Budget, the Government could push out the country’s return to surplus again.
“The Budget’s not going to look great given that the Government’s having to pay a whole lot more for fuel and just doesn’t have as much economic activity coming in. But again, that would be now, I think, the fourth year that you might see a push out. So for the ratings agencies, they’ve put us on notice, they’re not just going to keep watching as this happens. I wouldn’t be surprised within the next year if there’s not a larger sort of focus on fiscal consolidation that they might well sort of threaten to pull that trigger even harder.“
Treasury, in its half-yearly update last December said it saw New Zealand’s deficit deepening further, from $14 billion in the year to June 2025 to $16.9b in 2025/26, before narrowing to $60 million in 2029/30.
While that was an improvement from when Treasury last published forecasts at the May 2025 Budget, it still undershot National’s pre-election pledge to return the books to surplus by 2026/27.
Responding to the outlook downgrade, Willis said it was “another warning that we can’t afford to simply spend more and borrow more, or we risk higher interest rates, higher borrowing costs and more pressure on Kiwi families”.
Willis said New Zealand keeping its Aaa rating recognised the “resilient nature of our economy and strong commitment to fiscal discipline”.
“Moody’s are clear that improving our rating requires disciplined spending, a clear path to balanced books and reducing debt.“
“Moody’s warns that if deficits remain and debt keeps rising, our outlook will worsen - increasing the costs of servicing the debt, squeezing businesses and leaving less funding for the public services New Zealanders rely on.
“Debt servicing is now the fourth-largest cost to taxpayers, exceeding the combined costs of the police and defence forces, corrections, customs and the justice system. With global interest rates rising, we must keep our books in order to ensure New Zealand remains strong in a more unstable world.
“The revision also confirms the need for any support delivered in response to the Middle East conflict to be temporary and targeted. If we were to start clocking up the credit card like the previous government, every New Zealander would pay the price – with more of every taxpayer dollar going on interest, instead of hospitals, schools and roads.“