Deficit threat to NZ's credit rating, says S&P

New Zealand's ballooning current account deficit is the biggest threat to the country's sovereign credit rating, international credit rating agency Standard & Poor's said today.

"It's the thing that makes us most nervous about New Zealand," S&P's director of sovereign ratings, Brendan Flynn, told NZPA.

"The biggest risk to the rating is the current account deficit."

"It is something that we look at, and it's not just the current account deficit, it's also the net external debt that goes along with that. And if you look at New Zealand, that is the thing that concerns us most."

Statistics New Zealand today reported New Zealand had a $3.11 billion December quarter current account deficit, which saw the annual deficit swell to $9.4 billion -- equivalent to 6.4 per cent of GDP.

Mr Flynn said there was no question of New Zealand's AA-plus rating (one below the top AAA level) being downgraded.

"It's still on a stable outlook which means looking over the next two to three years, we don't expect any change to the rating."

However, he said the agency had been looking at the current account deficit in the last three quarters "in some depth".

The agency would also be concerned if there was a turnaround in export commodity prices that are enjoying 30 year highs without a commensurate fall in the kiwi dollar.

"It is a concern that if commodity prices were to weaken back to the levels we have seen more typically, what will happen to the current account deficit?"

However, he said if commodity prices started to weaken, it was probable that would be balanced by a weakening of the New Zealand dollar.

Mr Flynn said he had been surprised at the strength of the New Zealand dollar given the size of the current account deficit.

"History suggests it won't be there for very long, but how long it stays so strong and the implications for the current account deficit, I guess that's the key question."

Mr Flynn said the rise in New Zealand's level of net foreign debt to 65 per cent of GDP, or $94.5 billion, from 60 per cent a year earlier was concerning. Only Australia, the US and Iceland had similar proportions of net foreign debt.

At what point did the agency downgrade? "I'm reluctant to put any trigger point on it," he said.

"The fact that it is private sector debt and the Government is running a tight fiscal ship gives a lot of comfort."

He said the Government's finances were in a very strong position with very low debt levels by international standards.

"That buys the rating a bit of flexibility. It can withstand that higher level of external debt because the Government finances are in a very strong position."

He said another thing New Zealand had going for it at the moment was the economy was growing strongly and had continued to outperform expectations.

"For so long everyone has been expecting the economy to slow down, it's just managed to confound everyone's expectations. So that is also a positive."

- NZPA