S&P affirms NZ rating, fiscal strength offsets private debt

BUSINESSDESK: Rating agency Standard & Poor’s has affirmed New Zealand's AA rating, saying the Crown's strong balance sheet mitigates the nation's high level of private debt.

New Zealand retained its AA foreign currency long-term rating and kept a stable outlook, S&P said.

The rating agency said that reflects New Zealand's resilient economy and "strong political and economic institutions that back decisive policy reform".

S&P backed the government's plan to get the books back in the black by 2015, provided demand for exports do not decline and prices for local raw materials don’t deteriorate.

Like other international agencies, it flagged New Zealand's high external liabilities as a threat.

"The stable outlook balances the stabilisation we expect between the government's debt profile over the medium term and the risks associated with the country's high external debt," analyst Kyran Curry says.

"The strength in the government finances is an important mitigating factor to the risks associated with the external position."

S&P affirmed the AA rating in May after the government unveiled its 2012 Budget, having cut the rating last year in response to the mounting costs of the Canterbury earthquakes and ballooning foreign debt.

If investors deemed the debt burden too high, they could pull their funds from New Zealand denominated assets, which could see the kiwi dollar depreciate, which would push up bank borrowing costs and hinder economic growth, S&P said.

It estimates local and central government reported a cash deficit of 8.2% of gross domestic product in 2011 and will incur a deficit of 7.8% of GDP in 2012. Stripping out the impact of the Canterbury quakes, those deficits would be 3.6% and 4.4% respectively.

The country's fiscal position could worsen if "revenues weaken and expenditure associated with automatic stabilisers (such as unemployment benefits) increased, along with possible stimulus spending".

The New Zealand dollar recently traded at 81.23 US cents from 81.13 cents immediately before the release, and up from 80.72 cents at 8am in Wellington.