S&P downgrades New Zealand's rating to AA

Standard & Poor's has followed fellow ratings agency Fitch to cut New Zealand’s credit ratings.

The agency’s long-term foreign currency ratings on New Zealand have been lowered to AA from AA+ and its its long-term local currency rating to AA+ from AAA.

Short-term ratings are held at A-1+. The outlook on the foreign and local currency ratings is stable.

S&P said the move came because it believed it is more likely New Zealand’s external position will deteriorate further at a time when the country’s fiscal settings have been weakened by earthquake-related spending pressures and fiscal stimulus to support growth.

S&P sovereign credit analyst Kyran Curry said in a statement the stable outlook balanced the expected stabilisation between the government's debt profile over the medium term and risks associated with the country's high external debt.

“We expect the New Zealand major banks’ credit profile to remain sound and for New Zealand to remain a core market for the banks’ Australian parents. 

“We also consider the strength in government finances to be an important mitigating factor to the risks associated with the external position.”

Downward pressure on New Zealand’s ratings could re-emerge if New Zealand's external position continued to deteriorate, he said.

“Rising public savings will be an important component for keeping the country’s current account deficit in check. On the other hand, upward pressure on the ratings could eventually emerge if sustained current account surpluses, led by a stronger export performance and higher public savings, markedly reduced external debt,” Mr Curry said.

One of the other big three ratings agencies, Fitch, cut New Zealand’s long-term local rating one notch from AA+ to AA and its foreign currency rating from the top AAA to AA+ early this morning, amid concern over high external debt.

That saw the New Zealand dollar slide below below 77USc this morning.

Questionable trigger?
S&P said New Zealand’s fiscal position has been weakened by Christchurch earthquake-related spending pressures and fiscal stimulus to support growth.

Annette Beacher, head of Asia Pacific research at TD Securities said S&P's emphasis on Christchurch earthquake related spending pressures was a “questionable trigger” for a rating downgrade.

“S&P has a choppy history, fluctuating from stable to negative several times since the AA+ (stable) rating was first announced in January 1996," she said.

“There was a downgrade from stable to negative outlook in early 2009, only to be reversed to a stable outlook after the May 2009 Budget but was swiftly back to negative outlook from November 2010.

S&P appear to blame earthquake-related expenses as the trigger for a downgrade, as the external position has actually improved in the last 18 months.

"This is a questionable trigger." 

Goal posts moved
Finance Minister Bill English stayed positive, saying the credit rating downgrades reflect global concern about foreign debt in the current world economic environment.

“Compared to other countries, New Zealand has come through the recession reasonably well. We’re one of only 19 countries still rated AAA by Moody’s and we’re now the only highly-rated country with a two notch gap between our ratings with Moody’s and Standard and Poor’s.

“This reflects our unusual position of having relatively low public debt, but large private sector external debt, built up over several decades.”

The New Zealand dollar fell on the news, recently trading at 76.90USc, down from 77.73USc yesterday.

JP Morgan noted that the kiwi dollar has been the worst performing currency the past week and remains one of the most expensive currencies based on our long-term valuation metrics.

This month Reserve Bank governor Alan Bollard held the official cash rate at a record-low 2.5% for a fourth straight review, saying worsening global economic and financial risks made it prudent to stay on hold.

Where to now for interest rates?
Earlier today Deutsche Bank NZ chief economist Darren Gibbs said it is now less likely the Reserve Bank would hike interest rates any time soon.

And he doubted that trading banks would rush out and use this announcement as an excuse to raise mortgage rates.

“The Reserve Bank will be seeking to ensure that end users of money are not paying more at this point, given the economy is still relatively fragile and there’s still downside risk out there around the global economy.”

Mr Gibbs said while the cost of funds was on the increase the incremental impact on bank funding costs of Fitch’s announcement will not be that large. 

The biggest increase in spreads had already come as a result of the general increase in stress in international markets over the last couple of months, he said.

“So the impact is probably five to 10 basis points, if that,” he said following Fitch’s downgrade but before S&P acted.

“I’d be surprised if we saw a raft of banks coming out and using this as an excuse to move mortgage rates.” 

Westpac senior economist Anne Bonniface said typically a lower credit rating would increase the cost of funds for the New Zealand economy and the government.

Westpac had already flagged the possibility of rising borrowing costs independent of changes in the OCR, as a result of heightened global financial market volatility. 

“That possibility reinforces our view that the Reserve Bank remains firmly in wait and see mode for now,” she said.

Both S&P and Fitch are more focused on New Zealand’s broader debt and any risk that in a highly stressed international financial environment that debt could fall back on the government,” Mr Gibbs said.

Moody’s tended to focus on the government’s actual level of debt, which is considered low relative other triple A rated countries.

Moody’s last report on New Zealand was on August, 15 re-affirming its Aaa/outlook stable.

Ms Beacher said it had to be only be a matter of time before Moody’s at least attached a negative outlook to New Zealand, "given that there is now a two-notch difference between Moody’s and its peers."