S&P Affirms Rtgs on NZ As Prudence Continues

S&P Affirms Rtgs on New Zealand As Prudence Continues

Ratings on New Zealand Affirmed As Government Sticks to Prudent Economic Management

SINGAPORE (Standard & Poor's) Oct. 17, 2002--Standard & Poor’s Ratings Services said today it affirmed its sovereign credit ratings on New Zealand, including the double-”A’-plus long-term foreign currency ratings. The outlook is stable.

“New Zealand’s ratings are supported by strong institutions, stable and orthodox macroeconomic policies, a healthy fiscal position, and a resilient, competitive economy that is underpinned by past structural reforms”, said Ping Chew, Associate Director at Standard & Poor's Sovereign Ratings Group.

A broad-based and deep-rooted consensus favoring responsible and predictable economic policies will ensure macroeconomic stability. Economic debate will revolve around emphasis rather than direction. For example, recent discussion and changes to monetary management concerning narrowing the target band of the Policy Target Agreements, reflects fine-tuning of successful policies rather than any radical change in strategy. The Reserve Bank of New Zealand is expected to run cautious and sustainable monetary policies, although inflation might rise slightly.

The government is in a healthy fiscal position, compared with many EU governments and “AAA’ rated sovereigns, with very low net general government debt to GDP at 20% of 2002 GDP. The economy has gained a degree of resilience and flexibility, alleviating the vulnerability to external shock of its small, narrow, and isolated economy.

Mr. Chew noted: “Nevertheless, New Zealand’s foreign currency rating is constrained by the high level of private sector leverage, including external debt, which reflects persistently high current account deficits of about 3%-5% of GDP, and the country’s low savings rate of about 18%. External debt measures are about eight times the median of “AAA’ rated sovereigns. Although Standard & Poor’s does not view the private sector as a substantial direct contingent risk for the sovereign, the sector’s reliance on external savings subject the economy to liquidity risk, and leaves the government little room to deviate from policies that could affect market sentiment toward New Zealand”.

New Zealand’s gradually falling net general government debt to GDP burden also supports the ratings, but an upgrade of the government’s foreign currency ratings depends on increasing flexibility to deal with external shocks, including limiting public support and maintaining growth prospects to attract foreign investments, given the high leverage and narrowness of the economy.

Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www2.standardandpoors.com; under Fixed Income in the left navigation bar, select Credit Ratings Actions. Alternatively, please call Standard & Poor’s Ratings Desk in Singapore on (65) 6438-2881.

Rationale

On Oct. 17, 2002, Standard & Poor's affirmed its ratings on New Zealand. The ratings reflect:

- Strong institutions, and stable and orthodox macroeconomic policies. A consensus favoring responsible and predictable economic policies is deep-rooted, while economic debate revolves around emphasis and scope. For example, recent discussion and changes to monetary management reflects fine-tuning rather than any radical change in policy direction. The Reserve Bank of New Zealand is expected to run cautious and sustainable monetary policies, although inflation expectations might have been raised slightly.

- Healthy fiscal position. New Zealand’s ratio of net general government debt to GDP is projected to fall to below 20% in the medium term, well below most “AAA’ and “AA’ rated sovereigns, from 50% in 1993. The general government is projected to run a small average cash surplus of about 0.5% in the next few years, and is expected to be fiscally responsible, partly underpinned by the desire to pre-fund future pension liabilities.

- A resilient and competitive economy underpinned by past structural reforms. The economy is expected to continue growing at relatively respectable 2.5%-3% this year and for the next few, while unemployment will remain below 6%. Previous microeconomic reforms has produced flexible labor and product markets, liberalized the financial and capital markets, and de-regulated the economy. New Zealand has thereby gained a degree of resilience and flexibility, alleviating the vulnerability to external shocks of its small, narrow and isolated economy.

The foreign currency rating on New Zealand is constrained by high private sector debt. Domestic credit to the nonfinancial private sector is estimated to increase to 120% of GDP in 2002, from 91% in 1995. At more than 170% of current account receipts this year, private-sector external debt net of liquid assets is about four times the “AA’ median and eight-times the “AAA’ median of rated sovereigns. Growth of such debt reflects persistent high current account deficits of about 3%-5% of GDP, and a low savings rate of about 18%, compared with 22%-25% in “AAA’ and “AA’ sovereigns. Although Standard & Poor’s does not view the private sector as a substantial direct contingent risk for the sovereign, the sector’s reliance on external savings subjects the economy to liquidity risk, and leaves the government little room to deviate from policies that could affect market sentiment on New Zealand.

Outlook

The stable outlook reflects the expectation that the Labour government will maintain a prudent fiscal stance, as demonstrated by the gradually falling burden of net general government debt to GDP. Given the high leverage and narrowness of the economy, increasing flexibility to deal with any external shocks, including limiting public support and maintaining growth prospects to attract foreign investments, will improve the government’s creditworthiness.

Contact: Ping Chew, Singapore (65) 6239-6345/Rick Shepherd, Melbourne (61) 3-9631-2040

RATINGS AFFIRMED

New Zealand

Sovereign credit ratings

Local currency AAA/Stable/A-1+

Foreign currency AA+/Stable/A-1+

Senior unsecured debt ratings

Local currency AAA

Foreign currency AA+

Commercial paper rating A-1+

Short-term debt rating A-1+

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