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New Zealand’s “monetary policy flexibility, rich economy, and strong institutions” are allowing “decisive political action” and putting the country in a strong position for economic recovery, rating agency S&P Global says in a new report. .
S&P Global has affirmed New Zealand’s “AA / A-1 +” local currency and “AA + / A-1 +” local currency sovereign credit ratings and has maintained a positive outlook for the foreseeable future.
“The positive outlook reflects our view that New Zealand’s strong fundamentals will allow its fiscal profile to strengthen after the Covid-19 outbreak subsides, leading to a rating upgrade in the next one to two years.” S&P Global said.
That bodes well for the Reserve Bank and the Government, as they seem to avoid the worst impacts of the Covid-19 pandemic with higher levels of international debt.
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Rating agencies like S&P Global have a great influence on setting the cost of borrowing for governments.
It wasn’t all good news, and the agency noted that New Zealand was now almost certainly in recession.
“The Covid-19 outbreak and subsequent government shutdown have caused a severe economic and fiscal shock in New Zealand,” said S&P.
“We believe that the economy is in recession, and that the government’s fiscal position is weakening substantially more than forecast after the December 2019 mid-year budget.”
“However, we expect budget performance to improve after the large deficit in fiscal year 2021 as the pandemic subsides.”
Net general government debt is likely to remain at high levels for several years.
S&P Global noted some of New Zealand’s economic weaknesses, specifically high levels of private debt linked to the residential housing market and the agricultural sector.
But he said that, taken together, current economic strengths provided the country with “flexibility to offset potential risks related to its large external imbalances, high debt in households and the agricultural sector, dependence on income from basic products and stability of the financial system. “
“We believe that the economy and the financial system are less susceptible to external financing risks than in the past.”
The report includes a “downside” scenario that could push New Zealand’s outlook down from positive to stable.
“We could revise our outlook to stable if the fiscal deficits are substantially weaker than our forecasts, which would increase debt levels and interest costs,” said S&P.
“This would reduce the government’s room for maneuver to address potential risks from the macroeconomic and financial sector, should they materialize.”
New Zealand’s economy is expected to weaken substantially this year before recovering in 2021.
“The government’s fiscal stimulus and related measures aim to support the economy during this period,” he says.
“These measures should soften the blow presented by Covid-19 and support the subsequent economic recovery.”
New Zealand’s free floating exchange rate, the dollar, has depreciated sharply since mid-2014 and has fallen 10 percent this year relative to the US dollar, would support the economic recovery, S&P said.
“To date, the New Zealand financial system is successfully navigating another financial and economic crisis,” he said.
“With this in mind, we believe that the financial system will maintain easy access to external capital markets and is less susceptible to changes in external demand than in the past.”
S&P Global warns that a home price correction is likely.
“Property prices grew more than 9 percent during the first three quarters of fiscal year 2020, increasing the risks of a sharp correction,” he said.
“We believe that property prices are likely to drop about 10 percent in the next 12 months because the economy is in recession and unemployment is increasing and migration is slowing down due to travel restrictions.”
The rating agency also provided strong support for the Reserve Bank of New Zealand (RBNZ) and its policy response.
“The inflation mandate and the supervisory role of the RBNZ have great credibility, and the central bank is operationally independent from the government,” he said.
