Moody's: Rising debt a concern, but rating outlook stable

Moody's Investors Service maintained a stable outlook on New Zealand's sovereign ratings after the release of the budget.

While the budget indicated continuing pressure on public finances for several years to come, because the country's finances were starting from a relatively strong position, the Aaa rating was not immediately affected by the projected debt path, Moody's said.

Measures announced in the budget, including decisions not to go forward with tax cuts in the next two fiscal years and not to contribute to the Superfund for an indefinite period, would limit the deterioration in the budget balance in the near term.

But longer term projections made it appear New Zealand's fiscal recovery from the current global recession would be more prolonged than in most other countries, Moody's said.

"All advanced economies are seeing fiscal costs associated with the global credit crisis and recession," Steven Hess, Moody's vice-president and lead analyst for New Zealand, said.

"And, in the case of New Zealand, costs resulting from assistance to the financial system are small compared to some other countries. Therefore, the deterioration in the fiscal position indicates a more structural problem rather than the one-time shock coming from the credit crisis."

Despite projections in the budget of deficits that will cause gross debt to rise to 43 per cent of gross domestic product by 2017 before it begins to decline, New Zealand was starting from a solid government financial position. Now the ratio was only somewhat above 20 per cent.

"Because the starting point for the debt ratios is low, a rising trend for the next several years does not necessarily threaten the government's rating," Mr Hess said.

Compared to most other advanced-country governments, the peak debt ratio projected by the Government was still moderate.

Furthermore, debt net of certain Reserve Bank obligations and assets of the Treasury, would be considerably less, peaking at 36 per cent of GDP in 2017.

A key consideration after the recession ended would be whether the debt trajectory looked likely to be maintained at or below levels projected in the budget.

"A return to higher economic growth after the recession would be supportive of the rating, but this remains problematic, given New Zealand's small scale and relative lack of diversity compared to larger economies," Mr Hess said.

"So, pressure on the rating could develop after the recession if government revenues do not increase sufficiently."

- NZPA