Budget 2023: S&P fires warning shot, ‘headroom’ for credit rating could erode

Ratings agency S&P Global said a “somewhat expansionary” Budget could further weaken New Zealand’s external accounts, and erode headroom for its sovereign ratings.

S&P analyst Martin Foo said recession risks and reconstruction costs from Cyclone Gabrielle were delaying New Zealand’s post-Covid “fiscal repair”.

“If a somewhat expansionary fiscal stance adds to the import bill, this could further weaken external accounts and erode headroom for the sovereign ratings on New Zealand,” Foo said.

The Budget showed the Government was juggling competing priorities.

“On one hand, it seeks to ease cost of living pressures, on the other, it strives to avoid fanning the flames of inflation,” Foo said.

“The Budget revises up the projected central government cash deficit for fiscal 2023-2024 [year-end June 30] to 6.5 per cent of GDP.”

This was a big uptick from the 4.3 per cent deficit pencilled in five months ago, and 2.2 per cent a year ago.

“However, we still anticipate fiscal improvement in the subsequent years as emergency spending programmes are rapidly phased out,” he said.

S&P expects net general government debt to stabilise at around 30 to 35 per cent of GDP - around the middle of the range of the 18 sovereigns that S&P has the ‘AA’ category.

The agency said any further new spending may stoke inflation.

Up to $4 billion in reprioritisations and savings will partly offset disaster recovery costs to address $5b of damage to public infrastructure.

S&P’s AA plus rating reflected New Zealand’s strong institutional settings, monetary policy flexibility, and a wealthy economy.

“To maintain these ratings, and because of external vulnerabilities it faces, New Zealand must deliver stronger fiscal metrics than peers,” Foo said.

Downward pressure on the sovereign ratings could eventuate if external metrics remain weak.

S&P’s base case assumes a narrowing current account deficit over the next three years, as slowing domestic demand compresses imports and tourism inflows rebound.

“Cyclone Gabrielle, however, could alter this trajectory if the rebuild drives imports higher than we expect,” Foo said.

S&P noted the economy contracted in the fourth quarter of 2022 and another weak GDP print beckons for the first quarter of 2023, after severe floods in Auckland and Cyclone Gabrielle.

“There are, however, substantial tailwinds from low unemployment and a recent surge in inbound migration,” Foo said.

S&P has in the past fired warning shots over New Zealand’s current account shortfall, which said was “at an extremely high level”.

In March, Stats NZ said the current account deficit blew out to 8.9 per cent of gross domestic product in 2022.

Competing agency Moody’s, in its comment on the Budget, said New Zealand’s fiscal metrics had seen a moderate deterioration, largely driven by the impacts of the Covid pandemic, the North Island weather events, and the impact of high domestic and global inflation.

”We expect fiscal repair to continue, albeit slightly delayed than we earlier expected, but will be in line with its fiscal targets,” Moody’s said. “Supported by its fiscal policy framework, New Zealand’s fiscal position remains solid compared with peers and will likely enable it to respond effectively to economic shocks.”