Ratings agency Moody's appears comfortable with the New Zealand government's current and forecast debt levels, saying it is "highly likely" levels will remain on the stronger side of its Aaa sovereign credit rating range.
However Moody's gave a small warning about New Zealand's lack of diversity in the economy and noted the potential risks from the country's reliance on offshore funding.
The comments came in a report on sovereigns rated Aaa by Moody's, which also assessed the US, UK, France, Germany, Australia and Singapore. The comments should rest well with the New Zealand Debt Management Office, which is seeking to raise an average NZ$300 million a week from international financial markets to fund the government's budget commitments.
'New Zealand's govt debt levels favourable'
Despite a significant worsening trend, New Zealand’s government debt levels still compared favourably with the median levels of other Aaa-rated sovereigns and were expected to continue to do so, Moody's said in the report.
"From a low point of 26% of GDP just before the economy entered a prolonged, but mild, recession, the ratio of gross general government debt to GDP has risen to over 40% and will rise somewhat further over the next few years," Moody's said.
"The central government’s net debt, which is the government’s policy target, is projected to rise from a low of about 6% of GDP in 2008 to nearly 30% in 2015, when it will peak and begin declining. The long-term goal of fiscal policy is to reduce this ratio to under 20%," it said.
"These projections represent a small deterioration from those included in the last budget, driven by the effects of the costs of the 2010 Canterbury earthquake, other one-off factors, and expectations of somewhat lower nominal GDP growth than earlier. Nonetheless, New Zealand’s general government debt levels, even at their projected peak levels, are well below the median for Aaa-rated countries, both as a percent of GDP and as a percent of government revenues," it said.
In its December Half Year Economic and Fiscal Update, the New Zealand Treasury forecast net government debt to rise to a peak of 28.5% of GDP in 2015. However Treasury's downside scenario for the economy projected net debt could approach 40% in five year's time if economic growth did not recover as expected.
Following the half year update Prime Minister John Key said New Zealand's government debt would not worry ratings agencies until net debt hit 30% of GDP. "The ratings agencies tell us ‘look if your debt is under 30%, you’re of no concern to them, if it’s between 30-60% they think it might hold back growth a little bit, but again of no major concern, anywhere near 100% then you really get their attention," Key said before Christmas. In other comments Key said New Zealanders should not panic about the government's fiscal situation.
'Strong banking system helps'
New Zealand’s banking system had no significant problems as a result of the global financial crisis, although access to offshore funding was a potential risk that did not materialise except for a brief period, Moody's said in the report.
"The strength of the banking system, together with the strength of the Australian parents of the largest NZ banks, indicates that the contingent liability to the government’s balance sheet from this source is small. Therefore, even with some further slippage in government debt ratios coming from slower growth or other one-time shocks, it appears highly likely that these ratios will remain within the stronger side of the Aaa range," it said.
New Zealand's Finance Minister Bill English has spoken before about his worries the country's funding pipeline would be turned off in the case of a sovereign crisis in Europe. "We learnt from 2008 that we have one cash pipeline coming in here, which is the Australian banks borrowing essentially in European and American financial markets," English said in November.
That pipeline could shut, English said, and it did. "It shut down for a number of months in 2008 and these people are getting grumpier, they’re not settling down."
'Household debt hurting growth'
The outlook for economic growth was somewhat constrained by household debt levels and developments in the property market, Moody's said in the report.
"In addition, inflation is also likely to be lower as a result of slower real growth, and nominal growth will also not be as high as earlier forecast. Thus, the impact of growth on government revenues will be felt during the coming few years," Moody's said. Weaker growth and inflation expectations have led Westpac, and more recently ASB, economicts to pick the Reserve Bank of New Zealand will not begin to raise the Official Cash Rate until September this year.
"New Zealand’s economic strength is classified as “High” rather than “Very High” in Moody’s sovereign rating methodology. This is because of the relative lack of diversity in the economy. Although high dairy prices are currently a source of strength, the somewhat weaker growth trend going forward confirms our assessment of the country’s economic strength," Moody's said.
'Likely to stay Aaa'
Overall, the path toward reaching the government’s target of net debt of less than 20% of GDP had been lengthened by slower-than-expected nominal growth and the effect of one-time events such as the Canterbury earthquake in 2010, it said in the report.
"Nonetheless, the central government (“Core Crown”) operating deficit is forecast by the government to peak in at 4.5% of GDP in the current fiscal year and to return to a small surplus in the 2013-14 fiscal year. The government hopes to keep expenditure growth lower than the (downwardly revised) nominal GDP growth in the next several years, with the ratio of expenditure to GDP falling from 34.9% this year to around 32% in 2013-14," Moody's said.
"With revenue rising a bit more rapidly than nominal GDP, the result is a return to an operating surplus. Another external shock that affected economic growth could, of course, derail the path toward fiscal consolidation, but the baseline indicates that New Zealand’s fiscal position will continue to support its Aaa rating," it said.
Eyes on NZ's private sector debt
Despite the ratings agencies seeming comfortable with the New Zealand government's debt, another agency, Standard and Poor's, last week warned on New Zealand's "high risk" economic imbalances, partly due to high levels of private sector debt.
"We assess New Zealand's economic imbalances as "high risk" because of its persistently high current account deficits, high external debt to current account receipts of about 200%, increasing level of private sector debt, and occasional periods of rapid growth in house and equity prices. These risks are, in our view, partly mitigated by effective hedging of external debt. We also note that FDI funds a sizable part of the current account deficit," S&P said.
However a stable, transparent policy environment, strong institutions, and sound public finances helped support New Zealand's economic stability, Standard & Poor's said.
In November S&P placed New Zealand's AA+ credit rating on negative outlook, suggesting a 30% chance of a downgrade in the next two years. However Key said he thought the move stemmed from the private sector's indebtedness and S&P's reassessment of risk following the Irish debt crisis.
Treasury Secretary John Whitehead last year warned on the country's overall debt levels, saying the S&P move showed financial markets wanted to see an improvement in the nation's debt levels.
"Our net foreign debt position, as a country, is one of the largest in the developed world, at nearly 90% of GDP at last count. And the company we are keeping in this respect may ring some alarm bells," Whitehead said in November.
"Many countries with similar levels of external indebtedness to us are now experiencing severe fiscal and economic stress," he said.
"While New Zealand’s low starting level of government debt appears to be an important differentiating feature, our government debt is rising. This trend, and the vulnerability to another external shock associated with our high national level of indebtedness, suggests that action is warranted," Whitehead said.