Wellington, Oct 5 NZPA - A turnaround in the current account deficit has helped New Zealand retain its ratings from agency Fitch Ratings.
Fitch has affirmed New Zealand's foreign currency long-term Issuer Default Rating (IDR) at 'AA+', local currency long term IDR at 'AAA', foreign currency short term rating at 'F1+' and the Country Ceiling at 'AAA'. The outlook on the ratings is negative.
A "notable" turnaround in the large current account deficit, which dampened rising foreign indebtedness during the period from the first quarter of 2009 to the first quarter of 2010, as well as extensive private sector hedging activities, helped to avert a downgrade, Fitch Asia-Pacific sovereign team director Ai Ling Ngiam said in a statement overnight.
Fitch maintained the negative outlook as prospects for a sustained structural improvement in New Zealand's external finances remained unclear and yet to be observed, following more concerted initiatives by the authorities to address the issue, Ms Ngiam said.
The key to reducing external financing risks was a sustained correction in the domestic savings-investment imbalance.
So far, evidence of New Zealand's household balance sheet rebalancing was mixed and non-conclusive.
Plagued by a poor job market and low wage gains during 2008-09, NZ households' savings worsened to minus 13.7 percent in March 2009 from minus 11 percent of household disposable income in March 2008.
In comparison, Fitch said it estimated that on average, OECD member countries' household savings rate rose on a calendar year basis from 5.1 percent in 2007 to 7.1 percent of household disposable income in 2009, with notable gains in other 'AA' rated sovereigns including Australia and Ireland.
In the context of a possibly protracted structural adjustment process on household savings, public savings provide the other key to the sustainability of NZ's savings-investment imbalance, Fitch said.
Due to more rigid spending requirements in the form of higher benefit payouts and higher interest costs, fiscal spending was unlikely to be cut back in line with the decline in revenue to reduce the fiscal deficit until the 2012 financial year.
At the current pace of fiscal consolidation, Fitch estimated that general government savings would likely continue to decline by 0.3-0.5 percentage points to register a low of less than 2 percent of GDP in 2011 before recovering back closer to pre-2008 levels in 2013.
On an optimistic note, the NZ tax authorities had undertaken credible and extensive structural reform initiatives aimed at fundamentally restructuring the local economy away from borrowing, consumption and fiscal spending towards savings, productive investments and exports, Fitch said.
The social implications of ongoing tax and benefit reforms suggested they would require strong political consensus to carry forward and time to take effect on household behaviour.
In a further positive development, the composition of banks' funding had changed, due to the central bank's introduction of a prudential liquidity policy as well as more expensive wholesale funding costs.
That should serve as a cap on short term external financing and put upward pressure on deposit rates to attract more savings, Fitch said.
NZ's ratings remained supported by strong credit fundamentals including the high quality of public institutions and governance, a credible commitment to low inflation, and track record of policy and structural adjustment.
Potential triggers for a downgrade included accelerated household re-leveraging, especially if further external borrowing pushed the current account deficit and net international investment position further into deficit and heightened risks to financial and economic stability.
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