NZ govt's deferred operating surplus won't hurt credit rating, Moody's

Wednesday 17th December 2014

The one year delay forecast in the New Zealand government's return to surplus doesn't have any implications for its Aaa credit rating, with everything else going in the right direction, according to Moody's Investors Service.

Yesterday's half year economic and fiscal update pushed out the Treasury's expectation for a return to surplus, projecting the Crown’s operating balance before gains and losses to be a deficit of $572 million in the year ending June 30, 2015 before turning to a surplus of $565 million the following year. Moody's senior vice president Steven Hess doesn't see any risks emerging to the nation's sovereign credit rating, with debt ratios coming under control and surpluses projected in later years.

"There's no rating implication whatsoever," Hess told a media briefing in Wellington today. "Everything else is moving in the right direction and they'll achieve surplus in the next financial year."

Yesterday's downgrade was due to a weaker tax take than previously expected as persistently low interest rates erode revenue from resident withholding tax, household consumption lags estimates, weighing on goods and services taxes, tepid wage growth keeps a lid on personal income tax, and a slump in global dairy prices eats into corporate taxation.

Still, Finance Minister Bill English was optimistic a surplus might still be achieved if the government clamps down on its spending, and has kept the prospect of tax cuts targeted at lower and middle income earnings in 2017, the next election year.

Moody's Hess today said the government's debt has already peaked as a ratio to gross domestic product, and its target to bring net debt down to a ratio of 20 percent of GDP by 2020 is attainable "barring some other big shock."

The Treasury projects net debt to fall to 22.5 percent of GDP in 2019 from 26.5 percent of GDP in the current financial year.

Government figures today showed the current account deficit at a six year high of $2.5 billion in the three months ended Sept. 30, and at $6.1 billion, or 2.6 percent of GDP, on an annual basis. The Treasury forecasts the current account deficit will peak at 6.2 percent of GDP in March 2016, before falling back to 5.9 percent of GDP by March 2019.

Moody's Hess said he wasn't particularly concerned with the projected increase in the current account deficit, with New Zealand running bigger shortfalls in the past without any impact on its ability to source international funding, and could be potentially smaller than forecast as households increase their savings rates.

BusinessDesk.co.nz

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