By BRIAN FALLOW ECONOMICS EDITOR
Standard & Poor's has revised the outlook for New Zealand's sovereign credit rating from negative to stable, as its concerns arising from the change of Government have been allayed.
The AA+ rating has had a negative outlook tag since September 1998, about the same time that rival credit rating agency Moody's downgraded New Zealand a notch.
Standard & Poor's director, public finance ratings, Rick Shepherd, said the main concerns then were the widening current account deficit and growing external debt.
"As things went on, the current account deficit started to come under control a little bit ... but the election of a new Government introduced some uncertainties about how its policies would pan out.
"We are satisfied now the fiscal position is looking okay, with an operating surplus of 0.7 per cent of GDP forecast for fiscal 2001."
Standard & Poor's believes fiscal surpluses will persist over the economic cycle, albeit at lower levels than in the mid-1990s, leading to a further gradual decline in net Government debt, which is already modest at around 20 per cent of GDP.
Mr Shepherd said, "The stable outlook means that, looking ahead for two or three years, we don't see any change in the ratings."
NZ's rating is the second-highest rating Standard & Poor's gives, and is on a par with Australia's.
Mr Shepherd said too many other factors were influencing interest rates to say how much of an effect, if any, the move would have on rates, but other things being equal it would be positive.
If the strength of the Crown's accounts is the main positive factor in the rating, the main negative is the high level of overseas debt of the country as a whole.
Standard & Poor's noted that the private sector's external debt, net of liquid assets, is some 2.2 times exports, a ratio about three times as high as the median for AA-rated countries.
Mr Shepherd said that although the private sector external debt was high, a large part of it was in the banking sector, held by banks with creditworthy foreign parents, which was a source of comfort to the rating agency.
"To the extent it is in the corporate sector, we don't see any corporate distress signals," he said.
Chew Ping, the primary analyst covering New Zealand for Standard & Poor's, said concerns about the Government's more interventionist approach had been allayed in part by the decision to put Terralink into receivership.
"If the Government can be business-minded and put an SOE into receivership it indicates the Government is likely to handle not only SOEs but other corporate distress on a commercial basis."
Standard & Poor's has downgraded New Zealand Post's rating, after its decision to enter the banking market.
"While it is a speculative exercise, because it is a start-up and it will be a small bank in what some say is already an overbanked market, because it is a retail operation the downside risk is relatively low," Mr Shepherd said.
"In the context of the sovereign [credit rating], it would be trivial."
Other factors supporting the credit rating include the Reserve Bank's independence and cautious monetary policy.
The Reserve Bank's policy of not intervening in foreign exchange markets, and the fact that the New Zealand dollar is still a relatively widely traded currency "helps mitigate an otherwise weak international liquidity profile," Standard & Poor's said.
It also cited the flexible labour and product markets resulting from the reforms of the past twenty years.
Mr Chew said it still had concerns about the longer-term impact on the economy from the more rigid labour market flowing from the Employment Relations Act.
"But we don't see it impacting ratings yet."
NZ credit rating outlook returns to stable
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