NZ budget gets tick from S&P, 'sound public finances' support AA+ debt rating

Thursday 20th May 2010

New Zealand’s AA+ debt rating is secure after the 2010 budget, says Standard & Poor’s, with the nation’s credit supported by sound public finances and ‘open and transparent’ policies.

The Treasury forecast a fiscal deficit of 6.5% of gross domestic product in the year ending June 30, 2011, shrinking to 4.5% in 2012 and 3.3% in 2013, with the Crown accounts projected to be back in surplus by 2016.

While the 2011 deficit is large, “the outlook has improved since the last budget and there remains an achievable and believable path to return the operating position to surplus,” S&P credit analyst Kyran Curry said. New Zealand has sound public finances, a sound financial sector, resilient economy and open and transparent policy environment, he said.

That helps mitigate a “high level of private sector indebtedness at a time of continuing elevated stresses in the global financial system.”

The nation is vulnerable to any deterioration in international investor sentiment or unfavourable movements in the exchange rate, Curry said, noting that New Zealand’s external financing needs are “among the highest of any rated sovereign.”

With the current account deficit to sit at about 7% of GDP over the next few years, the nation’s net external debt is likely to continue to grow.

Yet New Zealand is likely to weather any further global shocks, with high levels of hedging of foreign currency debt, mostly in the private sector, a strong record of absorbing fluctuations in the kiwi dollar and “a strong history of prudent and flexible monetary and exchange rate management,” Curry said.

The kiwi dollar climbed to 68.71 US cents after the budget was released, from 67.97 cents immediately before it was released. The trade-weighted index climbed to 66.75 from 66.10.

Net debt is forecast to peak at 27.4% of gross domestic product in fiscal 2015, a year earlier than had been projected in the half-year update, which had debt reaching 30.4% of GDP by 2016.

English’s 2010 budget will hand New Zealanders combined personal, company and investment tax cuts amounting to $17.9 billion over the next four years. Raising goods and services tax to 15% from 12.5% and tightening rules for property investors and foreign investment means the loss of revenue to the Crown is reduced to just $415 million.

New Zealand emerged from the global financial crisis in better shape than most of its OECD peers, with only Australia and Poland managing smaller falls in real output.

Demand from Australia and China, rebounding commodity prices and end to the net outflow of migrants have put the economy on a stronger footing than the government was expecting just six months ago.

More Budget coverage:

Biggest tax package in a generation builds on lessons of global crisis

Finely balanced tax package depends on growth dividend

Recovery gives NZ tailwind to rebalance economy, cut taxes

Property depreciation write-offs: here today, gone tomorrow

Government cuts tax on savings vehicles to 28%

Government closes loophole and aligns tax rates for LAQCs

Indexation loss tightens screws on Working for Families

Businesswire.co.nz

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