No credit rating downgrade - Key

John Key says that it may take longer than five years to get the Crown accounts back into surplus. Photo / Martin Sykes

Prime Minister John Key suggested yesterday it would take longer than five years to get the Crown accounts back into surplus, but said he thought the Budget would be sound enough to prevent a credit rating downgrade.

However, he thinks New Zealand will be kept on negative watch by the rating agency Standard & Poor's which is in Wellington for Budget week.

S&P put New Zealand on negative watch in January after economic and fiscal forecasts in December showed a dramatic rise in forecast deficits in the order of $6 billion, and rocketing debt.

The global downturn worsened and Finance Minister Bill English said indefinite deficits of $10 billion were forecast without changes to spending.

S&P analyst Kyran Curry said the agency would be looking to see operating surpluses (excluding gains and losses on investments such as the Super Fund) over the next three to five years. Mr Key said yesterday that "in terms of a time scale that is a bit on the light side".

He said beyond that the numbers were very difficult and over the past decade the Treasury had been "unable to to get on top of its forecasting with a great deal of accuracy".

Mr Key said that of the three options for Standard and Poor's - a downgrade from its AA+, taking New Zealand off negative watch back to AA+ stable, or keeping New Zealand on negative watch - he believed it would be kept on negative watch.

Staying on negative watch with no downgrade would be unlikely to affect interest rates, said ASB chief economist Nick Tuffley, because it was the status quo.

A downgrade in rating could see the cost of credit rise, not just for the Government but for private sector debt as well, by an estimated 1.5 per cent to 2 per cent.

Mr Key said the Government had found a surprising amount of savings over the past six months which would be revealed on Thursday. He believed people would also be surprised by the housing insulation package.

Mr Key said the Government was doing the right thing in running deficits at present "because if we didn't do that, we would effectively be contracting the economy even more".

"That would cost even more jobs."

The Budget would also show that New Zealand was not going to have a "runaway balance sheet" that saddled future generations with excessive debt.

Mr Tuffley said negative watch had already been factored into interest rates and so keeping it on would not impact on interest rates.

He would expect New Zealand to stay on negative watch for a year or two if it was not downgraded.

He said the current account deficit which S&P put a lot of weight on would look a lot healthier this year because of a fall in imports.

He believed getting back into surplus within five years "seemed like a bit of an ask".

New Zealand Institute economist Benedikte Jensen said that despite the failures of credit rating agencies over the subprime mortgage instruments, they were still hugely influential with foreign investors.

She believed getting back to surplus within five years was "quite an ambitious target".