KEY POINTS:
New Zealand's worsening debt position has prompted Standard & Poor's to downgrade the outlook for the country's foreign currency-denominated debt to negative.
The ratings agency also said the future of the foreign currency rating hinged on what the Government offered in its next budget, in May.
S&P's affirmed its AA+ foreign currency and AAA local currency long-term ratings on New Zealand, and revised the outlook on the foreign currency rating from stable.
The rating agency maintained its stable outlook on the local currency rating, and affirmed its A-1+ short-term ratings on New Zealand and ratings on the country's debt issues.
"The negative outlook on the foreign currency rating reflects the likelihood of a rating downgrade if external imbalances begin to pressure the country's investment, growth, and fiscal performance," S&P's sovereign analyst Kyran Curry said.
New Zealand's economic policy flexibility was becoming more limited as external imbalances grew, with the current account deficit now a "sizeable" 8 per cent of gross domestic product (GDP).
The Government was forecasting fiscal deficits on a cash basis of 3.7 per cent of GDP in 2009, 4.4 per cent of GDP in 2010, and 5.6 per cent of GDP in 2011.
Such deficits were not uncommon, given the lower tax take and government measures to offset the slowing economy, said Curry.
However, the Government needed a plan to consolidate the country's finances in the medium term to boost market confidence.
"New Zealand's next budget will, in our view, be a key indicator of the government's intent regarding medium-term expenditure cuts and reprioritising of policy initiatives," Curry said.
"A credible medium-term fiscal plan combined with an easing of New Zealand's external imbalances could result in the ratings stabilising at the existing levels. Absent such developments, the foreign currency rating could be lowered."
Prime Minister John Key will meet his economic ministers and key departmental heads on Thursday to discuss issues facing the country as a result of the global turmoil.
In its latest update, issued on December 18, Treasury predicted gross government debt doubling to 33 per cent of GDP by 2012-2013 and unemployment rising to 6.4 per cent as a result of the global slowdown.
Finance Minister Bill English said New Zealand was facing the most challenging economic conditions in a long time.
However, the Government expected the current account deficit to narrow somewhat in the next few years.
"In the meantime, the Government is committed to the kind of fiscal policy consolidation that Standard and Poor's has referred to," Mr English said.
S&P had taken similar action on ratings for Spain, Ireland and Greece in recent days, he said.
- NZPA
