S&P Revises NZ Outlook To Stable

S&P revised their long term foreign currency ratings outlook for New Zealand from Negative to Stable today. NZ's long term foreign currency rating remains unchanged at AA+. The AAA local currency rating was also affirmed.

This is positive news for the Kiwi - particularly since the news was rather unexpected. But don't get too excited though - it has only removed a source of potential negativity. While being on negative outlook technically meant that there was always the possibility that S&P could downgrade NZ, most in the market didn't really ever believe this was likely. So while today's announcement came as a bit of a surprise, it really only confirms what most of us already knew - see below.

By way of history, in March last year NZ's Negative outlook was affirmed. At that time, S&P said a downgrade could occur if the government's Operating Budget went into deficit. They also expressed concern over the Labour/Alliance government's interventionist stance, and the effect this could have on the labour market, and on NZ's ability to attract overseas funding for its already large current account.

You will recall that I never felt that a downgrade was likely. At the time of last year's affirmation of the negative outlook Finance Minister Cullen was already made plenty of noises about the importance of fiscal prudence. While in hindsight a downgrade may have been appropriate at the height of the Asian crisis in 1998, I have always felt that a downgrade last year would have been like shutting the gate after the horse had bolted.

In any case, the today S&P have removed the negative outlook and in particular have noted that it reflects:

The view that the Labour/Alliance coalition will maintain a fiscally prudent stance. Forecasts of a modest and gradual decline in the government's debt burden (surpluses being used to pay back debt). An independent central bank pursuing cautious monetary policy. A resilient economy with flexible labour markets.

However the rating is constrained by:

High public sector debt (120% GDP - up from 95% in 1995). A high current account deficit.

Regards,

David Croy NZ Market Strategist Westpac Institutional Bank +64 - 4 - 381 1411

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