Moody's semi-annual update report on Govt of New Zealand

New Zealand's Aaa rating is based on the country's high economic strength, very high institutional and government financial strength, and low susceptibility to event risk. New Zealand's flexible and market-oriented economic policies have supported economic performance that has become stronger and less subject to external shocks. Although per capita income is at the low end of the Aaa range, it is nonetheless high by global standards. The relatively small scale of the economy is also a factor considered in assessing economic strength. Institutional strength is very high, as measured by governance, rule of law, and transparency. In addition, Moody's expects that the government, regardless of the party in power, will maintain a policy of low debt and fiscal discipline.

While the fiscal balance deteriorated as a result of a recession and the earthquakes that struck the country in 2010 and 2011, the government that first came into office in 2008 and is now in its third term has indicated its intention to return debt to a prudent level. Gross “total crown” debt has peaked at well below 40% of GDP before beginning to decline, although the IMF reports a lower value using market value of the debt. We believe that the debt trajectory and the policy to deal with shocks remain compatible with a Aaa rating.

The external liability position will remain high. However, there are several factors that make the large external liability position less risky than it might appear, including the high proportion of liabilities denominated in NZ dollars and of foreign currency liabilities that are hedged, and the related-party nature of much of bank liabilities. The composition of the external liability position supports an assessment of low susceptibility to event risk.

The credit strengths underpinning New Zealand's Aaa rating include: (1) its advanced economy with strong government finances and sound monetary policy, (2) government debt levels that are lower than the median for Aaa sovereigns, despite a rise in recent years, (3) a strong fiscal framework and political consensus on targeting balanced budgets and low debt, and (4) a strong banking system that is mainly foreign owned, lessening the government's contingent liability.

The main credit challenges facing New Zealand include: (1) a resource-based economy that, on balance, remains exposed to volatile export earnings, and (2) one of the largest net external liability positions of advanced economies.

For more details, please find attached our latest semi-annual update report on the Government of New Zealand – Aaa Stable.

ENDS

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