Fitch Affirms New Zealand at 'AA'; Outlook Revised to Positive

Tue Jul 8, 2014 4:10am EDT

(The following statement was released by the rating agency) SYDNEY, July 08 (Fitch) Fitch Ratings has affirmed New Zealand's Long-term foreign and local currency IDRs at 'AA' and 'AA+' respectively. The issue ratings on New Zealand's senior unsecured foreign and local currency bonds are also affirmed at 'AA' and 'AA+' respectively. The Outlooks on the Long-term IDRs are revised to Positive from Stable. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS The revision of the Outlooks on New Zealand's sovereign ratings to Positive from Stable reflects the following factors: - Fiscal consolidation is strengthening the resilience of New Zealand's sovereign credit profile. Nonetheless, vulnerabilities remain, primarily related to high net external debt and strong commodity dependence. New Zealand remains heavily exposed to developments elsewhere, notably in China and Australia. - The fiscal consolidation drive continues to be strong and Fitch believes it is supported across the political spectrum. In the FY15 budget, the government projected its first fiscal surplus since 2008, capitalising on the strengthening economy. Even on a cyclically-adjusted basis, the IMF projects New Zealand will achieve a consolidation of 5pp in the primary balance over 2010-2014, exceeding the average for advanced economies of 3.6pp, France ('AA+') on 3.1pp, or the UK ('AA+') on 3.9pp. - The authorities have a credible plan to lift the fiscal surplus in the years ahead and reduce net core Crown public debt to 20% of GDP by FY20. This would approach the level of 18.1% in 2003, the year Fitch previously upgraded the rating to 'AA+'. Fitch projects gross public debt on its standard measure, the general government debt (GGD)/GDP ratio, to decline by 5.3pp over 2013-2016, which would be the sixth-biggest decline in the Organisation for Economic Cooperation and Development. GGD/GDP of 33% by end-2016 would be close to the 31% in 2003, when the ratings were a notch higher. - The macroeconomic record and prospects are supportive, with real GDP growth at 2.7% in 2013, and expected to rise to 3.8% in 2014 on the back of the reconstruction efforts in Canterbury, a local housing boom, and recently moderated, but still elevated dairy prices. Average real GDP growth for the past 5 years at 1.6% is lower than the 'AA' peer category median of 2.7%, but less volatile than peers and higher than the 'AAA' median of 1.2%. - Average inflation of 2.1% is lower than the 'AA' peer median of 2.7% and less volatile, although strong real GDP growth also brings challenges for policy makers, including a build-up in inflationary expectations that has prompted the Reserve Bank of New Zealand to start hiking the policy rate in March 2014. - New Zealand's economic policy framework, business environment and standards of governance rank among the world's strongest from a credit perspective, and warrant high-grade sovereign ratings. The sovereign has no history of debt default. - The persistent current account deficit, the need for foreign capital and net external indebtedness are longstanding weaknesses of the sovereign credit. These weaknesses are expected to persist, since the fiscal stance alone cannot credibly plug New Zealand's savings-investment gap. Net external debt, already the highest among all countries in the 'A', 'AA' and 'AAA' peer groups, is forecast to rise, but only moderately, to 72% of GDP by 2016, from 65.5% in 2013. However, this would remain within the range during the period 2003-2009, when New Zealand was previously rated 'AA+'/Stable Outlook. The current account deficit is projected to rise to 5.4% in 2016, reflecting continued strong investment demand in part due to the Canterbury rebuild. - New Zealand's economy has large, growing and connected "twin concentrations" in dairy exports and in exports to China. China overtook Australia to become New Zealand's biggest export market in Q4 2013. New Zealand is vulnerable to a shock to its terms of trade in the event of a sharp slowdown in China, although such a slowdown is not Fitch's base case. New Zealand's commodity dependence is high compared with other advanced economies, reflecting the importance of the country's agricultural sector. Dairy sector exports are vulnerable to the risk of a sudden dent in reputation, for instance related to a serious health issue, should one arise. However, this must be set against a baseline of likely steady strengthening in demand for New Zealand's exports from Emerging Asian trade partners as incomes rise. - House prices have increased by 9.7% in the past 12 months and 23% in the past three years on the back of a supply shortage, especially in Auckland and Canterbury, and net immigration supported by a booming economy. The Reserve Bank of New Zealand (RBNZ) has hiked its policy rate by 75bps, year to date, to 3.25%. Macro-prudential measures taken by the RBNZ in October 2013 to limit growth of high loan-to-value ratio (LVR) lending has caused the volume of house sales to fall and helped reduce risks to the banking system, but house prices remain high. - Household debt at 147% of disposable income at end-2013 is high, but banks are relatively strong on a stand-alone basis and are largely foreign-owned, limiting the contingent liabilities of the sovereign to support the system in the event of need. RATING SENSITIVITIES The main factors, individually or collectively, that could lead to positive rating action are: - Sustained fiscal consolidation leading to a steady reduction in public debt ratios - Evidence of the sovereign's ability and willingness to save anti-cyclically into the boom, mitigating the widening of external imbalances relative to previous economic cycles - Increased evidence that New Zealand's economy can grow over time without external indebtedness rising to unsustainable levels. The rating Outlooks are Positive. Hence, Fitch does not anticipate a material probability of negative action over the forecast period. However, the main factors that could see the ratings revert to Stable Outlook are: - A sharp and sustained rise in New Zealand's external borrowing costs, sufficient to have a durable negative impact on growth, employment, the public finances, and the health of the banking system. - A negative shock to the real economy with similar lasting adverse effects, exceeding the typical cyclical volatility of the economy. - A wider and/or longer-lasting current account deficit than Fitch currently projects, leading to even higher NXD ratios relative to peers and to its historical range. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: - Fitch assumes the Outlook for the global economy will remain broadly in line with the projections laid out in its June Global Economic Outlook. - New Zealand's productivity performance does not improve relative to historic behaviour over the forecast period to 2016. Contact: Primary Analyst Thomas Rookmaaker Director +852 2263 9891 Fitch Ratings (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Andrew Colquhoun Senior Director +852 2263 9938 Committee Chairperson Richard Fox Senior Director +44 20 3530 1444 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. 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