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NZ rating stays at AA+ with negative outlook

Data Flash (New Zealand)
S&P Decision - NZ rating stays at AA+ with negative outlook

Key Facts

* S&P announced today that NZ's foreign currency credit rating will remain unchanged at AA+. The agency retained the `negative outlook', which was introduced in September 1998.

* Moody's foreign currency rating for NZ is Aa2, which corresponds to AA on the S&P rating scale.

* S&P also affirmed its AAA long-term local currency rating, with a stable outlook.

* In support of the rating decision S&P quoted: - A low public sector debt burden, with net public external debt having fallen to 27% of exports - down from 75% in 1994. - Structural economic reforms, which have generated flexible product and labour markets. - An independent central bank pursuing cautious monetary policies.

* New Zealand's rating was seen as being constrained by: - High private sector debt. - A high level of corporate sector external debt (45% of GDP versus 30% in 1995).

* S&P argued that the magnitude of private sector leverage was reflected in persistent high current account deficits and that it reflected a significant contingent liability to the sovereign.

* The reasons for maintaining the negative outlook are: - The risk that the Labour/Alliance Government will not meet its target of keeping the budget in surplus over the cycle. - The risk that the Government's more interventionist microeconomic stance will make the labour market less flexible and will depress growth prospects. - The risk that the new Government's policies will impair the country's ability to attract overseas capital.

* S&P commented that a downgrade could occur if - the budget shifts into deficit; and/or - the government lends material support to the private sector should there be any signs of financial distress.

* Given extensive comments by S&P over recent weeks that downplayed the importance of the current account in its ratings decision, the market had increasingly factored in the possibility of an unchanged rating. As a result, the immediate NZD reaction was rather muted - a 20 bps lift to 0.4980 against the USD.

* While we expect significant pressure for extra expenditure from within the Government ranks, the probability of the fiscal balance recording a deficit over coming years has to be assessed as relatively low. In our view, the current account deficit will remain the key risk surrounding the current rating. Following a peak of 8% of GDP in late 1999, we do not expect the deficit to improve to below 6% over the next two years. That implies that foreign liabilities will be built up at a faster rate than GDP, thereby exacerbating the adverse trends in private sector leverage referred to in the S&P decision.

Ulf Schoefisch, Chief Economist, New Zealand,

This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

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