Debt rating firm despite soft data

A string of softer economic data last week has not altered Standard & Poor's outlook for New Zealand's debt rating, the international ratings agency says.

The Government slashed its forecast Budget surplus for this year as it lopped $1.5 billion off the value of the student loans in its books. On top of that, the September year current account deficit came in at a worse-than-expected $12.9 billion or 8.5 per cent of GDP while growth in the economy slowed to 0.2 per cent over the same period.

"Yes, the further widening of the current account deficit is certainly not a positive development," said S&P credit analyst Sharad Jain. "But our position remains that that's unsustainable and it should come down in the medium term to a more sustainable level of about 6 per cent."

Earlier this month, S&P reaffirmed New Zealand's rating at AA+/A-1+ - just behind the highest possible grade.

At the time, Jain warned high net foreign debt and the current account deficit posed risks.

Speaking from Melbourne late last week, Jain said that despite the smaller projected surplus, the Government's financial position remained "strong" and capable of supporting the private sector in the event of a crisis precipitated by the external position.

Jain said S&P's outlook for the Government's rating had not been changed by the revised forecast.

"The way we look at the forecast is slightly different to the way it's presented. The liquid sort of equities or investments are the ones that we net off against debt.

"While it's true the surpluses aren't quite as strong as they were forecast initially, there still continues to be a slight surplus if you assume that these investments are liquid.

"As a result, the net debt burden continues to trend down."

He said it was important the Government maintained a strong position because of external risks including the prospect of a bird flu pandemic.

"We don't view that by itself as a stand-alone risk but it's one that we do factor into the rating with a weak external position. If something happens on that account then exports will be hit hard and that will further precipitate any external crisis.

"These are largely the reasons we don't have a triple A currency rating on New Zealand even though the local currency is triple A. The Government finances are strong enough to support that kind of rating but it's more the external position that's proving to be a constraint."

Holding on

* S&P's rating for New Zealand remains unchanged despite softer economic data.

* While the wider current account deficit increases the country's vulnerability to external shocks, that is offset by strong Government finances.

* A softer forecast Budget surplus has not significantly weakened the Government's finances.