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Sept 9 (The following statement was released by the rating agency)
Fitch Ratings has affirmed New Zealand's (NZ) Long-Term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' and 'AA+' respectively. The Outlook is Stable. The Short-Term IDR has been affirmed at 'F1+'. The Country Ceiling has also been affirmed at 'AAA'.
KEY RATING DRIVERS
The affirmation of New Zealand's ratings with Stable Outlook reflects the following key rating drivers:
- The Stable Outlook on the ratings balances the prospect of fiscal consolidation and stabilisation of public debt ratios against Fitch's expectation that already-high net external indebtedness will rise further over the forecast period, exacerbating a long-standing credit weakness.
- New Zealand's economic policy framework, level of development 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.
- NZ's high net external indebtedness is a central sovereign credit weakness.
Net external debt (NXD) was 214% of current external receipts at end-2012 against the 'AA' range median of a net creditor position of 105%, and an OECD median net debtor position of 63%. Fitch projects NZ's current account deficit will widen and NXD ratios will rise further over the forecast period, led by accelerating residential construction and the reconstruction of Christchurch, a city affected by major earthquakes in 2010 and 2011.
- NZ's public indebtedness is below that of many advanced-economy peers. Direct public debt plus local government debt is projected at 42.9% of GDP at end-June 2013 (FY13), up from 20.7% at end-FY08 and above the end-2012 'AA' range median of 36.9%. The 22.2pp rise in NZ's debt since 2008 exceeds the median rise for the OECD countries over 2008-2012 of 16.3pp. However, Fitch expects NZ's ratio will decline from FY14 given the strength of the cross-party consensus on fiscal consolidation.
- NZ's households are relatively highly leveraged. Household debt stood at 144.5% of disposable income at end-2012 compared with about 100% in the US. Moreover, NZ's household indebtedness has declined only modestly from a peak of 153% of disposable income at end-FY09. The ratio has been rising since end-June 2012 as credit growth to households has re-accelerated. However, NZ's banks are relatively strong on a stand-alone basis and are largely foreign-owned, limiting the contingent liability on the sovereign to support the system in the event of need.
- Relatively low domestic savings underlies NZ's credit weaknesses of high external debt and private-sector leverage. The domestic savings rate averaged 21.5% over 2003-2012 against the OECD median of 23.3%.
- NZ's economic performance supports the ratings. GDP growth averaged 1.7% per annum over 2009-2013, not far below the median for 'AA' rated peers (2.2%), and above the median for 'AAA' rated peers (0.8%). NZ's growth has been less volatile than either rating category median. Inflation has been lower and less volatile than the 'AA' category median.
- Nevertheless, NZ's economy is highly commodity-dependent in comparison with other advanced economies, reflecting the importance of the country's agricultural sector. Commodity exports are projected to be 56% of CXR in 2013 against 10-year medians for the 'AA' range of 19%, and for the 'AAA' range of 13%. This reflects NZ's comparative advantages. However, it exposes NZ's economic stability and sovereign credit profile to business risks in the farming sector. A serious and lingering health issue such as an outbreak of foot and mouth disease would likely have a strong and lasting adverse effect on the economy and the broader credit profile, if it occurred, although the likelihood is low in Fitch's estimation.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.
The main factors, individually or collectively, that could lead to positive rating action are:
- Further progress in fiscal consolidation leading to an outlook for sustained reductions in public debt ratios;
- Rebalancing of the economy that put New Zealand's net external debt ratios on a sustainable downward path.
The main factors, individually or collectively, that could lead to a negative rating action are:
- A sharp and sustained rise in New Zealand's external borrowing costs that imposed a disruptive tightening on NZ's monetary and credit conditions 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 higher NXD ratios relative to peers.
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;
- The ratings incorporate an assumption that New Zealand's savings and productivity performance do not undergo a sharp structural change relative to historic behaviour over the forecast period to 2015.