Friday 15th May 2009 |
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Burgeoning debt is a major problem for New Zealand and could cost the country as much as $600 million in increased interest costs, said Treasury Secretary John Whitehead.
National debt is projected to increase to $245 billion, or more than 75% of gross domestic product, the Treasury Secretary said in a Wellington speech today.
The country’s sovereign credit rating is currently on negative watch at Standard & Poor’s, meaning it is at risk of being downgraded. Based on experience from Ireland, interest rates in New Zealand could rise 1.5 percentage points as a result of a lower credit rating, pushing up the cost of interest repayments, Whitehead said.
Prime Minister John Key and Finance Minister Bill English both say the government’s budget on May 28 will allay the rating agencies’ concerns about the economy, and avert a credit downgrade. Both have reiterated that the government will keep on top of the nation’s debt.
“The government strongly wants to avoid a downgrade,” said Philip Borkin, economist at ANZ National Bank. “We’re under a negative watch, where one-in-three change” to a lower credit rating.
New Zealand’s AA+ foreign currency credit rating was placed on negative watch by S&P in January as the current account deficit ballooned to 8.9% of GDP in the three months ended December. The Treasury forecasts it narrowed back to 8.6% in the first quarter.
Whitehead said cutting government spending was necessary to rein in debt, with credit rating agencies looking for a “credible, time consistent, fiscal strategy” that doesn’t include large tax increases. They’ve “noticed the projected debt and are watching to see how New Zealand responds to the impacts of the shock,” he said.
Ireland was the first AAA-rated sovereign to introduce a comprehensive bank guarantee scheme after the credit crunch saw liquidity dwindle in September last year. Its rating was downgraded in March by S&P and Fitch to AA+ with a negative outlook as its public finances deteriorated.
New Zealand’s banking system has been more resilient than Ireland’s, with the major Australian trading banks have relatively less exposure to the toxic, mortgage related assets that have plagued their European and American counterparts.
A New York-based think-tank raised the prospect of a credit rating downgrade for the U.S. in an opinion piece earlier this week. Peter G. Peterson Foundation chief executive David Walker said the “much-needed healthcare reform” could harm the financial condition of the world’s largest economy. He also said any failure of the federal government to deal with the global economic downturn could weigh on its rating.
Businesswire.co.nz
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