International rating agencies Standard & Poor's and Fitch Ratings on Friday downgraded New Zealand's credit rating by one notch, citing the economy's deteriorating external position.
Both Fitch and S&P lowered its long-term foreign currency ratings on New Zealand to AA from AA+, with "stable" outlooks. The agencies cut the long-term local-currency ratings to AA+ from AAA.
Lowering the rating, S&P said there is a likelihood that New Zealand's external position would deteriorate further at a time when the country's fiscal settings have been weakened by earthquake-related spending pressures and fiscal stimulus to support growth.
New Zealand's high level of net external debt is a key vulnerability that is likely to persist as the current account deficit is projected to widen again, reflecting a structural savings and investment imbalance, said Andrew Colquhoun, Fitch's Head of Asia-Pacific Sovereigns.
Fitch said it viewed New Zealand's high net external indebtedness as a key vulnerability, particularly in a global environment that has remained volatile since the ratings were assigned a "negative" outlook in 2009.
New Zealand's fiscal and monetary policy flexibility, economic resilience, public policy stability, and its sound financial sector are overshadowed by the country's very high external imbalances, accompanied by high household and agriculture debt, dependence on commodity income, and emerging fiscal pressures associated with its aging population, S&P said.
Responding the agencies' rating action, Finance Minister Bill English said it reflects global concern about foreign debt in the current world economic environment.
"Having inherited forecasts of permanent deficits and debt spiralling out of control, we've set a path back to surplus when most countries will still be in deficit and borrowing," English said.
Figures out Thursday show New Zealand's net international liabilities at 70 percent of GDP in the year to June, down from a peak of almost 86 percent two years ago and budget 2009 forecasts of more than 100 percent.
The minister said the ratings news reinforces the need for the government to continue with its clear and balanced plan to get on top of that debt. "That involves returning to surplus and exporting more to the rest of the world," he said.
S&P sovereign credit analyst Kyran Curry said the stable outlook balances the stabilization expected between the government's debt profile over the medium term and risks associated with the country's high external debt.
Curry said that the credit profile of New Zealand's major banks, however, will remain sound. But downward pressure on New Zealand's ratings could re-emerge if its external position continues to deteriorate, Curry noted.
S&P said it is also lowering the ratings on seven New Zealand local and regional governments and government-related entities.
New Zealand retains the highest possible AAA rating, with a stable outlook, with Moody's.
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