The New Zealand dollar rose to a 34-month high against the US on Monday afternoon, as Standard and Poor’s Global Ratings raised New Zealand’s sovereign credit rating.
The New Zealand dollar peaked at 73.4 US cents on Monday afternoon - the highest it’s been since April 2018.
The uptick followed S&P lifting New Zealand’s foreign currency rating to AA+ from AA, and its local currency rating to AAA from AA+. The outlook is stable.
The changes make New Zealand the first developed country with investment-grade debt to receive an upgrade since COVID-19 hit.
S&P noted New Zealand is recovering quicker from COVID-19 than most advanced economies, as it’s contained the spread of the virus.
“We now believe that the government’s credit metrics can withstand potential damage from negative shocks to the economy, including a possible weakening of the real estate market.” S&P said.
S&P also raised the ratings of the New Zealand Local Government Funding Agency, Kāinga Ora, Housing New Zealand and a number of local councils on the back of the move.
The upgrades signal buying bonds issued by the New Zealand Government and associated entities is a relatively safe investment. This means New Zealand can technically lower the cost of issuing this debt.
S&P credited the New Zealand Government for having low debt by global standards.
It went on to explain its rating upgrade decision, saying: "New Zealand's strong economic recovery reflects its proactive policymaking and decades of structural reforms. The economy, which is outperforming many advanced economies, remains wealthy and diverse in a global context after accounting for the COVID-19 pandemic.
"Stable institutional and governance settings underpin our rating with a high level of transparency and reliability…
"Downside risks persist, such as another outbreak, geopolitical tensions between major trading partners, and delays administrating an effective vaccine. Furthermore, travel restrictions will continue to severely limit tourism and international student flows as well as migration levels, dragging on short-term population growth…
"Because of a historical build-up in property prices, the risk of a sharp correction remains elevated. This is especially so in the current environment, with potentially higher unemployment flowing from the pandemic. If prices decline sharply, the effect on financial institutions would be amplified by the New Zealand economy's external weaknesses, particularly its persistent current account deficits.
"A property correction is not our base case, given New Zealand's strong fundamentals…
"We believe economic growth and low interest rates will continue to drive property price appreciation in the next half year, with the effect of the revised LVR [loan-to-value ratio] restrictions taking some time to flow through to property prices."
Finance Minister Grant Robertson said: “Our careful management of the Government’s books meant we were in good shape as we went into 2020, particularly with relatively low public debt. That stood us in good stead as we supported our people and our businesses through the pandemic."