Risk of NZ credit downgrade not on cards despite deficits expected in pre-election fiscal update - S&P

The possibility of a credit rating downgrade remains unlikely for New Zealand, a top ratings agency says as the Treasury prepares to open the Government's books for the last time before October's election. 

Treasury will next week unveil the pre-election fiscal update (PREFU), with expectations New Zealand's books would have taken a hard hit. The Government's most recent accounts for the 11 months to the end of May showed tax revenue falling more than $2 billion behind where Treasury had forecast in Budget 2023. 

However, New Zealand - which has an AA+ credit rating - was "actually still in a pretty strong place", said S&P Global Ratings sovereign analyst Martin Foo. 

"We know there are some challenges with the fiscal deficit and the current account deficit... but, apart from that, we're still pretty confident in the AA+ credit rating," he told AM. 

In the wake of the 2011 Christchurch earthquake, S&P stripped New Zealand of its coveted AA+ rating - citing Government debt levels.  

It wasn't until 2021 that rating was returned to AA+ from AA, given New Zealand's initial handling and economic recovery from the COVID-19 pandemic. 

"The AA+ credit rating is still very, very high in a global context - it's still on par with countries like Austria, Finland and the United States of America," said Foo. 

"We acknowledge that there are challenges ahead, China is slowing; in recent weeks there's been some rethinking about where the terminal interest rates might go and probably some acknowledgement that inflation is stickier; and there'll be some tricky obstacles for the Government to confront with PREFU and the state of tax collections but, overall, I think the credit rating is underpinned by very strong institutions and low net debt compared to peers." 

The other major rating agencies, Fitch and Moody's, rate New Zealand sovereign debt AA+ and Aaa respectively. 

Foo said while New Zealand's current account deficit (meaning the country was exporting less than importing) had blown out to 9 percent of GDP, S&P was assuming it would narrow in the next couple of years. 

"We understand that it's temporarily elevated because of a few factors that we expect to subside such as very high energy prices as well as the fact that the tourism industry hasn't fully recovered yet." 

Those factors would normalise in the coming years, he said.