AA+ rating renewed - with a warning

By BRIAN FALLOW

Standard & Poor's has reaffirmed New Zealand's AA+ credit rating, but pointed to its continued dependence on foreign lenders as a source of vulnerability.

The ratings agency said New Zealand's high level of external debt and continuing current account deficits barred it from the highest possible AAA rating.

Not counting equity investment, New Zealand is a net debtor to the rest of the world to the tune of $83 billion or 60 per cent of gross domestic product, of which the private sector accounts for $75 billion. The current account deficit in the year ended March was $5.7 billion or 4.2 per cent of GDP.

S&P credit analyst Brian Flynn said New Zealand relied on foreigners continuing to to invest in the economy.

"Any souring of foreign investor sentiment towards New Zealand could force difficult economic adjustments on the country, which could in turn reduce the current fiscal strength."

New Zealand was more vulnerable than other countries with high levels of external indebtedness such as Australia and the US, both of which were rated AAA, because its economy was more narrowly based and was distant from world markets.

But Flynn said it was hard to see the AA+ rating coming under pressure any time soon. "The strength of government finances, with low and falling public sector debt, underpins New Zealand's strong credit quality," he said.

"However, it will be important for the Government and Opposition to resist temptations to diminish this strength in the lead-up to next year's election by making financially irresponsible promises to the electorate."

Finance Minister Michael Cullen said the Government had several policies to promote saving, one of which was the New Zealand Superannuation Fund to partially prefund future pensions.