Standard & Poor’s has revised its outlook of New Zealand’s credit rating to negative from stable, 18 months after changing the rating the other way.
S&P had raised the outlook on New Zealand’s rating to stable from negative in May 2009 following the 2009-10 budget .
Now the outlook is back to negative with S&P worried about the external account and funding for banks and government entities.
The long-term foreign currency credit rating was affirmed at AA plus.
Under the S&P system, the outlook change implies a one in three chance of a downgrade in the medium term.
The news came and went as NZ remains concerned about the rescue of 29 miners from a coal mine on the South Island.
But it was a big shock, taking markets by surprise and knocking the Kiwi dollar down a cent at one stage.
"The outlook revision on the foreign currency ratings reflect our recognition of the risks stemming from New Zealand’s projected widening external imbalances in the context of the country’s weakened fiscal flexibility," said sovereign ratings credit analyst Kyran Curry.
"New Zealand’s vulnerability to external shocks, arising from its open and relatively undiversified economy, also raises risks to the country’s economic recovery and credit quality."
He said positives for the economy include NZ’s fiscal and monetary policy flexibility, strong institutions, economic resilience and its actively traded currency.
The negative outlook on the New Zealand foreign currency ratings reflected the possibility of a ratings downgrade if New Zealand’s external position did not improve and rising public savings would be an important component of such an improvement.
The rating could fall too if New Zealand’s current account weakened because of any higher real cross-border funding costs within its banks.
"The main risk to the ratings would be a significant weakening in the credit quality of New Zealand’s banking sector, which is largely owned by the Australian banks," said Mr Curry.
But that stance would also rely on the standing of the Australian banks in this country.
So any move by the Greens or the Federal Opposition to push for tighter regulation might affect S&P’s view of the health of banks here and in NZ.
Last Friday NZ Reserve Bank governor Alan Bollard warned that economic recovery in New Zealand could be a "prolonged process".
He told a conference that government spending in New Zealand had provided a cushion in the past few years, but the deficit would need to be closed.
That deficit will come under pressure from the $NZ4 billion cost of rebuilding the quake damage in around Christchurch in the South Island.
While much of that will be financed by insurance, there will be a cost of revenues from lower levels of activity in the Canterbury area, offset by the impact of the spending on rebuilding the damaged parts of the city in the next several years.
Meanwhile the immigration drain from NZ continues, according to the latest figures.
Net migration in the past year was 12,600, slightly above the long-term average, but the monthly gain was just 700 in October, as more people left for Australia, according to Statistics NZ.
Seasonally adjusted net migration (arrivals minus departures) was 700 in October, down from 1,000 in September.
The figures show that around 3000 people left for Australia in October, up from 1900 in October last year.
But it was still down on the 3,600 who left for Australia in October 2008, as the GFC was intensifying.
Net migration in the year to October 2010 was 12,600, down from 18,600 in the same period the previous year.
