Good news for New Zealand and the country’s conservative government in the run up to the national elections later this year – Fitch yesterday upgraded the country’s credit rating to AA positive, which means there’s a slight chance of a further upgrade within the next couple of years.
Fitch now has NZ on a higher rating than do Moody’s and Standard & Poor’s which both have the country on a AA rating with a stable outlook.
The news saw the country’s currency rise to just under 88 USc – a few points under its year high of 88.08 USc.
In a notice issued in New York, Fitch said the NZ government’s fiscal consolidation drive continues to be strong and Fitch believed it was supported across the political spectrum.
That was seen as a sign Fitch believes September’s general election will not significantly change the fiscal performance.
That political acceptance will also be judged by S&P which has injected more politics into its sovereign ratings methodology.
Fitch noted the government was on course for an operating surplus in the 2014-2015 fiscal year, the first since 2008, and that GDP growth was 2.7% in 2013 and expected to hit 3.8% this year "on the back of the reconstruction efforts in Canterbury, a local housing boom, and recently moderated, but still elevated dairy prices," according to Fitch.
"The authorities have a credible plan to lift the fiscal surplus in the years ahead and reduce net core Crown public debt to 20% of GDP by FY20.
"This would approach the level of 18.1% in 2003, the year Fitch previously upgraded the rating to ‘AA+," Fitch said yesterday.
But it sees inflationary pressures growing (a situation behind the three rates rises from the Reserve Bank of NZ), and then there’s the "persistent current account deficit, the need for foreign capital and net external indebtedness" which are longstanding weaknesses that are expected to persist.
Net external debt is forecast to rise moderately to 72% of GDP by 2016 from 65.5% in 2013.
Fitch warned that New Zealand’s economy had large, growing and connected "twin concentrations" in dairy exports and in exports to China, that made it vulnerable to a slowdown in China, and its dairy exports were also vulnerable to the risk of "a sudden dent in reputation" such as a serious health issue.
"New Zealand’s economic policy framework, business environment and standards of governance rank among the world’s strongest from a credit perspective, and warrant high-grade sovereign ratings," Fitch said.
"The sovereign has no history of debt default – the persistent current account deficit, the need for foreign capital and net external indebtedness are longstanding weaknesses of the sovereign credit.
"These weaknesses are expected to persist, since the fiscal stance alone cannot credibly plug New Zealand’s savings-investment gap. Net external debt (is) already the highest among all countries in the ‘A’, ‘AA’ and ‘AAA’ peer groups," Fitch said.
The upgrade came as the NZ Treasury reported the Budget deficit was tracking $NZ332 million worse than forecast for the 11 months to the end of May.
The Government has been promising to deliver a Budget surplus, and the May Budget forecast a surplus for the 2014-15 year of $NZ372 million, well ahead of the tiny $86m forecast last December.
The Treasury said the Budget deficit excluding gains and losses was $NZ1.1 billion against $NZ770m forecast in the May Budget. Weaker GST and corporate tax returns were blamed.
