Blow to NZ’s economy


Growing economic confidence has been knocked by New Zealand being placed on negative creditwatch as the Government puts its hat out to international lenders.

International ratings agency Fitch said it was worried about New Zealand’s high debt levels and reliance on overseas borrowing. The agency confirmed New Zealand’s rating at AA plus, but yesterday’s decision to revise its outlook for New Zealand’s credit rating from stable to negative came out of the blue.

It comes as the Government looks to increase its borrowing the Budget foreshadowed a need to borrow $34 billion over the next four years to help cushion the blow of a recession. Any threat of a downgrade could push up borrowing costs. But Finance Minister English said he was confident that would not happen.

The Government had so far managed to raise money “at a reasonable cost”. But with the Fitch warning coming as it prepared to seek more money between now and Christmas, more assurances may be required. “We are setting out to borrow a large amount of money and we’re going to be going to those investors who are lending us to tell them our story.

No doubt this kind of new rating will mean they’ve got a few more questions.” Earlier in the year, there were serious concerns the global credit crunch would leave money in short supply and force the Government to borrow at higher rates.

A credit downgrade hung over the Government in the leadup to the May Budget, but its decision to cancel the next round of tax cuts and trim spending looked to have staved that off, with one of the biggest ratings agencies, Standard & Poor’s, awarding an upgrade.

Fitch said it was worried about the medium-term growth outlook for New Zealand given its persistently large current account deficit and rising indebtedness. Analysts said it also appeared to be worried about the risk of another housing market bubble, funded by overseas borrowings.

Fitch head of Asia Pacific sovereign ratings James McCormack told Radio New Zealand today that he thought New Zealand’s current account deficit was a structural feature of the economy. “It does tell us the economy as a whole is living beyond its means and borrowing money to finance that,” he said.

“When the economy is living beyond its means you can divide it into the public and private sector and the private sector is not saving enough money in New Zealand, so we think if that is going to be the case going forward then it comes down to the public sector to save more money.”

That would mean spending cuts. Fitch was not critical of the Government providing tax cuts, saying countries all over the world were trying to provide short term stimulus during a global recession. Ad Feedback It acknowledged it was a difficult time for exporters. “It’s difficult for the export sector, there’s no question about that, there’s the pricing effect and there’s the New Zealand dollar and the third factor is global demand.” Householders needed to change their behaviour. “Household savings are particularly low in New Zealand, even lower than they have been in the US. . . they probably need to come up to a higher level.” Mr McCormack said if householders did improve saving there could be an “unpleasant adjustment” as their reduced spending impacted on the economy.

The previous government started the Kiwisaver scheme and New Zealand Superannuation Fund to improve savings but it was “probably not enough”. Another concern Fitch raised was that the housing sector may bounce back and see even more borrowing. Mr Fitch said the agency would continue monitoring what happened in New Zealand. Credit rating downgrades affect New Zealand’s ability to borrow money and interest rates charged. “I think in order for the outlook to go up to stable we’d need to see an adjustment in the current account balance,” Mr McCormack said. “We started to see that in the first quarter.

If the current account deficit continues to decline and decline in a meaningful way such that the external debt of New Zealand stabilises then I think the rating outlook could go back to stable.” Both the previous Labour government and the National Government have continually urged New Zealanders to save more. But its pessimism contrasts with signs of renewed confidence in recent weeks including Reserve Bank Governor Alan Bollard’s suggestion that New Zealand is likely to begin recovering from the global financial crisis ahead of the pack. “The New Zealand economy has taken some knocks but some form of recovery is now on the horizon,” he told a business audience this week.

But Dr Bollard appears to be ahead of the Government Mr English was careful yesterday not to endorse his view. Asked if he agreed with Dr Bollard, he would say only “any optimism is welcome”. There was one silver lining yesterday, however the Fitch report came as Mr English was in Brisbane for talk with his Australian counterpart, Wayne Swan, where a deal was finally done to allow workers from each country to transfer their retirement savings home.

Australia’s tax office estimates as much as A$13 billion (NZ$16.17b) is held in lost accounts within its compulsory superannuation system much of it believed to belong to Kiwis who have crossed the ditch to work. New Zealanders will now be able to transfer those savings to their KiwiSaver accounts, and vice versa. Mr English said he expected legislation within 12 months.


The difference between what we earn overseas from our exports and investments, and what we pay for our imports and the investments foreigners have in New Zealand. – with NZPA