New Zealand's credit rating will be downgraded if the current account deficit is not brought under control, international ratings agency Standard & Poor's says.
S&P yesterday reaffirmed New Zealand's rating at AA+/A-1+ - just behind the highest possible grade - but credit analyst Sharad Jain warned high net foreign debt and the current account deficit posed risks. They could add to weakening investor sentiment and a rapid fall in the kiwi.
Although S&P expected the current account deficit, now at 8 per cent of GDP, to return to historical levels, "the rating could come under pressure if that does not happen".
After the warning, the kiwi slipped to 70.90USc from 71.74USc at Tuesday night's close before ending the day at 71.13USc.
ANZ Investment Bank senior dealer Mark Elliott said S&P's stable rating reflected its expectations New Zealand's current account deficit would return to historical levels.
"The current account can't return to historical levels unless there is a depreciation of the currency. In other words, they are saying the currency has to depreciate to underpin that rating or the ratings will come under pressure," Elliott said.
Despite the warning, S&P praised New Zealand's top economic managers for maintaining low public debt and continued good fiscal management which meant the country was well placed to weather any external economic shocks.
"Favourable fiscal and monetary performances, economic resilience and conservative macroeconomic management all underpin New Zealand's ratings," said S&P.
New Zealand's substantially agriculture-based economy had become less susceptible to external shocks due to liberalisation and fiscal and monetary flexibility.
One of the lowest levels of public debt in the world should support the Government's ability to "weather any storm brought on by currency weakness or plunging investor confidence". Jain said despite some spending pressures, the public debt burden should continue to decrease.
Finance Minister Michael Cullen welcomed S&P's decision, saying it underlined the importance of generating a stronger savings culture, increasing labour productivity and broadening the economic base.
- additional reporting NZPA
Credit rating downgrade possible
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