RPT-Fitch: NZ Budget Credit Supportive, As Fitch Expected

Fri May 16, 2014 9:13am EDT

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May 16 (Reuters) - (The following statement was released by the rating agency)

The New Zealand budget for FY15 plans to capitalise on the strengthening economy to increase the fiscal surplus and reduce net public debt, as Fitch Ratings expected.

The FY15 budget marks the crown government's first fiscal surplus since 2008 as it projects a core operating balance of plus 0.2% of GDP in FY15, steadily increasing to plus 1.3% by FY18. The adjustment will be achieved through a combination of strong revenue growth backed by a robust economy and expenditure constraints, with a stated target to bring core government spending back below 30% of GDP. While there are no explicit nominal spending cuts, real expenditure growth is planned at just 0.6% per year over the medium term resulting in a slight reduction in real spending on a per capita basis.

The budget implies a contractionary fiscal stance, albeit slightly less than in the previous fiscal projections in December 2013. The Treasury puts the drag at negative 0.7% of GDP per year on average over the four years to June 2018. The budget will constrain New Zealand's private-sector-led boom, which is constructive for the economy's broader stability.

The budget raises the ceiling for operating expenditure (unallocated spending) to NZD1.5bn per year from NZD1bn. This has driven a modest upward revision in the authorities' borrowing programme to NZD8bn from NZD7bn. Nonetheless, booming GDP growth will see New Zealand's public debt profile strengthen sooner than the authorities previously expected.

New Zealand's net general government public debt increased rapidly to an estimated 40% of GDP in 2013 from 21% in 2007. The budget plan provides a sustainable, long-term framework for the reduction of public debt, with the government targeting net core government debt to peak at 26% of GDP in FY15 and to fall to 20% by FY20. The government intends to maintain core crown debt within the range of 10%-20% of GDP, still significantly higher than the trough of 5.5% in 2008.

The fiscal stance alone cannot credibly plug New Zealand's savings-investment gap - a longstanding weakness for the sovereign credit. The current account deficit, need for foreign capital and net external indebtedness are all expected to persist. Budget economic forecasts see the current account deficit widening to above 6% of GDP by 2018 owing to a strong exchange rate, falling dairy prices and increased demand for imports.

Net external debt, already the highest among all countries in the 'A', 'AA' and 'AAA' peer groups, is forecast to rise to 77% of GDP by 2018, from 67% in 2013. We continue to highlight the risks from New Zealand's high commodity dependence and its vulnerability to a shock to its terms of trade in the event of a sharp slowdown in China.