Moody's raises NZ rating

By BRIAN FALLOW

Ratings agency Moody's yesterday raised New Zealand's credit rating to Aaa, the highest possible and one the country has not had since 1983.

But the ratings upgrade, two notches from Aa2, had less to do with any reappraisal of New Zealand's outlook than a general rethink by Moody's about the risk of sovereign debt default by small, open, developed countries.

Australia and Iceland were also upgraded to Aaa at the same time.

Steven Hess, the lead analyst responsible for New Zealand, said: "You are doing pretty well by New Zealand, and even by global, standards these days but that wasn't the primary reason for this [upgrade]."

The likelihood of a government declaring a debt moratorium or imposing capital controls in a country such as New Zealand, with very low government foreign currency debt, a floating currency and the kind of economic policy framework it has, was almost inconceivable, he said, even if there were some sort of crisis.

Moody's still thinks that the New Zealand economy is more vulnerable than some other Aaa-rated countries to external shocks, because of the high level of foreign debt the country - as distinct from the Government - carries.

But that is New Zealand's problem, not one for the foreign holders of New Zealand Government debt.

National Bank chief economist Dr John McDermott said that at the margin the upgrade might make it a little cheaper for the Government and companies to borrow through the bond market.

"People who are willing to lend to New Zealand corporates probably already understand the situation here and the fact that New Zealand and Australia have had a pretty good run.

"So it will be a small improvement. But every little bit helps."

Deutsche Bank economist Darren Gibbs said bond yields had fallen 2 or 3 points on the news.

"And that will probably be the sum total of the impact," he said.

"Arguably, most investors already looked at us as pretty much Aaa anyway in terms of foreign currency debt, which is why the market reaction is relatively muted."

Finance Minister Michael Cullen said the upgrade was "a clear sign of international confidence in the current Government's fiscal and economic management".

Moody's downgraded New Zealand's sovereign debt rating from Aaa to Aa1 in 1983.

A further downgrade, to Aa2, occurred in 1998 in the wake of the Asian crisis.

The other main ratings agency, Standard and Poor's, last week left New Zealand's ratings unchanged at AA+, one notch down from AAA.

S&P noted the Government's healthy fiscal position, compared with many AAA-rated countries, but said the rating was constrained by the high level of private sector debt.