S&P affirms NZ's AA-plus credit rating

3.15pm

Standard & Poor's today affirmed its AA-plus sovereign credit rating for New Zealand.

The outlook remained stable and only the high level of private sector debt was restraining the economy from getting a top-notch AAA ranking, S&P analyst Rick Shepherd told NZPA.

"The economy is bowling along quite nicely. It's all really steady as she goes," he said.

New Zealand's external debt-to-current account receipts ratio was about four times the median of 'AAA' rated sovereigns.

"Although Standard & Poor's does not view the private sector as a substantial direct contingent risk for the sovereign, the sector's reliance on external savings subjects the economy to liquidity risk and leaves the Government little room to deviate from policies that could affect market sentiment toward New Zealand."

The Government is congratulated for the big budget surpluses it is running.

"The government is in a healthy fiscal position, compared with many European Union governments and 'AAA' rated sovereigns, with very low net general government debt to GDP at 19 per cent of 2003 GDP," S&P's sovereign credit analyst Ping Chew said in a statement.

Mr Shepherd said that "basically it's the Government's fiscal position that's key for us. The fiscal position is reasonably strong."

The high level of foreign debt was "a vulnerability, which is why we kept the rating at the AA-plus level, which by international standards is an excellent rating," Mr Shepherd said.

Executives from rival rating agency Moody's are understood to have been in Wellington in the past week and it is also expected to affirm New Zealand's rating this week or next.

Mr Chew said the AA-plus rating reflected New Zealand's strong institutions and commitment to stable and conservative policies.

"New Zealand has gained a degree of resilience and flexibility, alleviating the vulnerability to external shocks of its small, primary industry dependent, and remote, economy."

He said a broad-based and deep-rooted consensus favouring responsible and predictable economic policies had developed ensuring economic stability.

The economy is expected to continue growing at a "respectable" 2.5-3.0 per cent this year and for the next few years, while unemployment should stay at about 5 per cent.

There was broad political agreement across the spectrum to maintaining fiscal responsibility, which underpinned Government spending discipline, Mr Chew noted.

The net debt ratio is seen declining steadily, due to the build-up of assets through pre-funding future spending for the ageing population.

Mr Shepherd said New Zealand's high foreign debt was not a grave concern, especially as it mostly denominated in New Zealand dollars or hedged.

But it meant New Zealand was dependent on international investor sentiment "and that can be a flighty thing".

If the Government reduced its net debt to under 10 per cent of GDP, S&P would have to look closely at raising the rating to AAA, he said.

However, he understood the Government was not aiming to reduce net debt. The agency disputes the Government's claim that student loans, running at $5.3 billion at the end of the last financial year, are an asset when counting current debt. The loans were not liquid enough, the said.

Commenting on recent Reserve Bank concern that New Zealand bank's were foreign owned and mostly Australian, Mr Shepherd said: "Far from a concern it is a benefit. It means New Zealand has exported the contingent risk of the banking system to Australia".

Finance Minister Michael Cullen welcomed the report. He said the Government was "actively looking at" prudent policies to attract foreign investment, as suggested by S&P.

"It is a key aspect of both the Growth and Innovation Framework and the recently announced review of the Overseas Investment Act," Dr Cullen said.

Yesterday, in its annual outlook on the economy the OECD said New Zealand's resources were stretched due to strong growth but should soon cool to "more normal rates of growth".

The Paris-based Organisation for Economic Cooperation and Development estimated economic growth will decline gradually -- from 4.4 per cent in 2002 to 3.3 per cent this year, 3.2 per cent in 2004 and 2.9 per cent in 2005.

- NZPA