By Alex Tarrant
Finance Minister Bill English says the decision by Standard and Poor's and Fitch Ratings to cut New Zealand's sovereign credit rating by one notch to AA reflected global concern about foreign debt.
Prime Minister John Key later added the downgrades were "not at all" embarrassing for the government, which had been touting its relative economic strength in recent weeks as the mood grew darker in Europe and the US. Key said New Zealand should be careful but optimistic about its prospects, although a slower than expected Christchurch rebuild, or a rise in costs from the quakes, and a global double-dip recession would hurt further.
English said the agencies had acknowledged the government had made progress in getting its deficits and debt under control despite the Global Financial Crisis and and the Canterbury earthquakes.
The downgrades reinforced the need for the government to get on top of its debts and return to surplus.
“Since we were elected nearly three years ago, this Government has focused on managing New Zealand through the Global Financial Crisis and starting to reduce our single biggest economic vulnerability – namely, our longstanding reliance on foreign debt," English said in a statement.
“Having inherited forecasts of permanent deficits and debt spiralling out of control, we’ve set a path back to surplus when most countries will still be in deficit and borrowing. New Zealand’s private savings have started to increase and as a result we have started to reduce our total external debt. But it still remains high," he said.
English pointed to figures showing New Zealand’s net international liabilities were 70% of GDP in the year to June – down from a peak of almost 86% two years ago and Budget 2009 forecasts of more than 100%.
“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," he said.
“This reflects our unusual position of having relatively low public debt, but large private sector external debt, built up over several decades.”
English said recent volatility on global financial markets highlighted how the international environment had changed.
“We are not immune to the global backdrop. In particular, investors are now reassessing their appetite for debt and credit ratings agencies are taking a tougher stance. When it comes to debt, the global market goalposts have changed," he said.
“The ratings news today reinforces the need for the Government to continue with its clear and balanced plan to get on top of that debt. That involves returning to surplus and exporting more to the rest of the world."
English later told a news conference he was sticking with his forecast for a surplus in the 2014/15 year and said that had the government cut spending by more in its budgets it would not have avoided these credit rating downgrades.
English attacks Labour
“By comparison, our political opponents to the left, who wanted a big expensive fiscal expansion during the recession, are still promising to borrow more, spend more and tax more. In the current environment, that’s irresponsible and would make a challenging situation even worse," English said.
“And those to the right of us are calling for radical spending cuts that would disproportionately affect the most vulnerable New Zealanders, cut growth and cost jobs," he said.
“We are following a balanced economic plan that is right for New Zealand.”
'Households won't return to debt-fuelled ways'
Given the focus on private sector debt, English said the government was asking households to do two things at one – pay down debt and save more. Incomes would need to rise, meaning economic growth was an important part of the equation.
“We’re still reasonably confident in the moderate economic growth that’s been forecast. A combination of continued growth in exports, which has actually exceeded expectations in the last 12 months, and the extra boost we’ll get from the Christchurch rebuild. Looking out over two or three years, those are both factors that we think remain in play,” he said.
English said the government was confident that the changes seen in household behaviour, where they were spending less and saving more, would remain, even as the economy started to grow again.
“The ratings agencies are forecasting fairly big current account deficits, so their view is that New Zealand households will revert back to where they were in 2005/06/07, back to their old habits. We don’t think that’s going to happen,” he said.
Events like today’s downgrades were a clear signal for households that debt was a risk. Households should also see the tightening up of government as a sign they were not going to get more transfers to boost their incomes.
The government was optimistic the current account deficit would not balloon back out. Standard & Poor’s said that any upward pressure on the rating would come if sustained current account surpluses, coupled with strong export growth and higher public savings, led to a markedly reduced external debt.
“If we can get to a position to where the current account runs somewhere around the rate of GDP growth, at least then you’re getting a stable net liability position,” English said.
“The problem here is we’re dealing with a history where it’s got consistently worse, and they’re just the grumpy bank manager looking at it and saying, well for the last 15 years you’ve got consistently worse, particularly the last 10, and we think you’re going to go back to that," he said.
“The first step in turning that around, which is a lengthy process is to get to where at least you stop growing the external debt. We’re getting close to that position, and then [if] New Zealanders continue their current shift in behaviour, if the government sticks to its surplus track and then tight government finances beyond that so it can repay debt, then we’ll be in a position where we’ll be reducing those external liabilities.”
We're linked to Asia
On the export side of the ledger, following IMF downgrades of most of New Zealand’s trading partner growth, English was confident New Zealand’s links to Asia would help as the US and Europe slowed.
The downturn in the US and Europe would have some effect on Asian economies, but the government was confident New Zealand’s position was such that it would be a bit less affected by it than its trading partners.
The falling New Zealand dollar would hopefully offset falls in commodity prices, and the outlook for particularly the dairy, meat and wool sectors was still strong.
“On the Asian economies, there are some question marks over growth there, but they tend to be focussed on the commodities that are used in their big investment-driven growth. That’s more copper, iron ore, coal, whereas it’s less clear that there’s a negative outlook for food, which is our basket," English said.
The government's focus was on improving competitiveness in New Zealand, by trying to drive jobs from the public sector to exporting sectors and improving infrastructure.
'Be careful but optimistic'
Prime Minister John Key said the downgrade reflected the very weak position of Europe and the US, which was worrying the rating agencies which had now downgraded eight developed countries.
“Secondly, they are still expressing concerns about our private sector debt, and those levels are high. The good news is we are starting to get on top as a country of that private sector debt. The third factor that they’re worried about is that so much of that private sector debt is owed to foreigners. That position’s not new. That private sector debt was built up over the period of 2003 to 2008," Key said.
The good news part of the story was the ratings agencies had reaffirmed the government was on the right track, its books were in good shape, and that its local country credit rating was still solid.
Key said he was “not at all” embarrassed by the downgrades, given his comments in recent weeks that the New Zealand economy was relatively strong compared to the Northern Hemisphere countries being downgraded.
“The New Zealand economy is quite strong. The issue here is the international environment is weak. There’s nothing new about [New Zealand’s] level of net external liabilities. They’ve been a problem ever since we’ve been the government, they’ve been a problem for New Zealand for the last ten years," Key said.
"That’s why we were put on negative outlook by S&P and by Fitch. But the reality is in terms of the New Zealand economy, it’s starting to perform very well. We will be back in surplus in a few years, we are creating jobs, we have been growing for eight of the last nine quarters. Those things are factually correct," he said.
The move was not likely to have a dramatic impact on the government’s cost of borrowing as the government still had a strong balance sheet.
Key was confident the government would return its books to surplus in 2014/15. The main risk to the New Zealand economy was a slowdown in China and Australia, he said.
Key noted the ratings agencies had mentioned costs arising from the Chrichchurch earthquakes as a factor in the downgrade. Half of the government’s NZ$18 billion deficit last year was down to the Christchurch earthquakes, he said.
“So if Christchurch is slower to rebuild, if the cost is greater, that can always have an impact on the economy. If global growth really slows, and we go into a double-dip recession, again all of those things impact New Zealand," Key said.
"But for the most part, New Zealand’s position is much better than many other countries. We’re in the Asia region, we’re producing what the world wants, I think it’s time to be careful but also optimistic about our future."
(Updated with video, further comments from news conference, details, links, comments from Key)