With the Government’s plan to introduce a cap on local government rates, a credit rating agency director wants to make it clear they're not trigger happy, “waiting to downgrade this reform.”
Anthony Walker, a director in sovereign and international public finance ratings at S&P Global Ratings, made that comment in a webinar on Wednesday about New Zealand councils, reforms and the rates cap proposal.
Asked if S&P is reconsidering its institutional framework score for NZ councils, and if it would be ready to downgrade because of this, Walker said it was waiting to see how councils react if the proposed rates cap gets implemented.
“If councils can’t raise their rates but they’ve actually cut their expenses and the balance is okay, then that’s fine.”
Walker said when it comes to the institutional framework, S&P lowered it last year and lowered a lot of council ratings because of it.
S&P lowered the credit ratings of 18 councils and three council-controlled organisations by one notch, citing councils’ high and rising debt burden and policy uncertainty.
"We did take a lot of heat in the market from our views”, Walker said, and part of S&P’s views were because there was a lot of uncertainty and a lot of policy change that was impacting councils negatively.
“Post that, we were seeing rates caps, regional councils potentially getting abolished. There’s a lot of other changes happening so I think that these kinds of measures we’re seeing right now have been incorporated in what we were doing last year.”
“We are not sitting here, contemplating, as of today, lowering the institutional framework because of rate caps. We already acknowledged in last year’s rating actions that New Zealand’s financials are much weaker than every other peers’ globally and that’s why we did it,” Walker said.
“This is kind of all flowing through our rating actions from last year. So don’t go stay up at night waiting for another institutional downgrade in the next year or two or three.”
Report on proposed rate caps
This webinar comes after S&P released a report on Monday, which said NZ councils face a credit overhang.
“Their revenue options are set to narrow due to incoming rate caps, but their spending needs will stay high.”
And options to resolve this aren’t clear cut, the report said.
Credit rating agencies like S&P assess an organisation’s financial strength, giving them ratings based on their capability and willingness to repay debts.
In December, Local Government Minister Simon Watts announced the Government would be progressing a rates cap for local councils with analysis suggesting a target range of 2% to 4% increases per capita, per year. This means rate increases would be limited to a maximum of 4%.
The cap will apply to all sources of rates - general rates, targeted rates and uniform annual changes - but will exclude water charges and other non-rates revenue like fees and charges.
At the time, Watts told reporters: “Our message to councils is clear: focus on the basics, live within your means and be more transparent and accountable to the communities in which you serve.”
In its report, S&P said budget plans indicate councils “are not yet prepared to adjust to the proposed rate caps”.
When it comes to the 24 councils it rates, 18 of those councils project that rate increases will exceed 4% each year from 2025 to 2029, it said
“Across all 78 local councils, none delivered a rate increase below 4% for 2024/2025, while only five were able to meet this standard in 2025/2026.”
The report said the ability of NZ councils to raise rates as a way to support fiscal outcomes is a “key credit strength” compared with similar systems across the world.
“The introduction of a rate cap will erode the sector’s flexibility to raise revenues.”
The impact on creditworthiness has variables, it said, and this included “how comprehensive and strict” the final caps are and how councils respond.
“If they can cut spending or make up revenue elsewhere, credit profiles should stand. If councils kick the can down the road, ratings will likely get dented.”
New Zealand’s sovereign credit rating
Walker said there had been some volatility amongst rating agencies when it comes to NZ’s sovereign rating.
In March, credit rating agency Fitch downgraded the outlook for NZ’s sovereign credit rating to negative from stable, although it maintained the core rating grade of AA+.
In its statement, Fitch said: “The outlook revision reflects our view that a substantial debt reduction is becoming more difficult to envisage, as fiscal consolidation has been delayed in the past few years.”
Walker said for S&P Global Ratings, it’s a stable outlook which means it doesn't expect a change in NZ sovereign, local currency or foreign currency rating.
“Our rating on the foreign currency AA+, for example, and that’s what we focus on, is underpinned by the wealthy economy and strong institutions. The rating assumes that the country will run modest deficits … We expect the deficits to start to narrow … but we do expect deficits of 3% to 4% going forward.”
In other words, Walker said, S&P doesn’t need to see the NZ sovereign deliver surpluses to keep the rating.
It was also assumed in this rating that net debt would be around 40% of gross domestic product which was below the threshold of 60% for a lower debt assessment.
“So there’s enough headroom here on the debt side and as well as the fiscal side to run modest deficits.”
There were some downsides and they could present themselves in the future like if deficits don’t narrow, Walker said.
“The other thing would be the country’s economic wealth … [New Zealand] actually ranks 22nd out of the 25 sovereigns rated AA or higher. So it’s fourth last on that list.”
Asked about a competitor putting the country and the New Zealand Local Government Funding Agency (LGFA) on a negative outlook, and what the impact on council credit ratings would be if S&P were to downgrade NZ and the LGFA, Walker said it had lowered the ratings to councils because they had risk rising.
S&P has highly rated the LGFA and it remains on a stable outlook, Walker said.
Management of the LGFA has been successfully able to offset deterioration, Walker said, which was also done by diversifying funding sources so it wasn’t just relying on NZ capital markets.
It has also increased its capital base so it has doubled its borrower note requirement. Walker said its borrower note was three times higher than what it was originally.
Its capital base is growing, which offsets greater credit risk, Walker said.
When it comes to rate caps by itself, this would probably have no impact on the LGFA's credit rating.
“If we were to lower the New Zealand sovereign rating that would impact the LGFA. That in itself would have a much more greater impact on the funding cost of the councils than actual individual council ratings that we’ve been lowering over the last couple of years," Walker said.
“So while we have been lowering council ratings, they’ve still been getting the cost savings for the LGFA whereas the reverse - we downgrade the LGFA, the impact will be much more on the councils.”
Walker made it clear it was not S&P's base case and not their expectations.
“If we were to lower the New Zealand sovereign [rating], that would have no impact on local councils directly on their ratings. That’s because no local councils under S&P’s methodology are rated the same as the sovereign," Walker said.
“It’s a capping from the New Zealand sovereign. It’s not a waterfall.”
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