Fitch and Standard & Poor’s on Friday downgraded New Zealand from an AA+ rating to AA.
In the past, New Zealand has enjoyed strong sovereign credit ratings due to relatively low levels of government borrowing that offset worries about the country’s high private debt. But the ratings agencies have become less sanguine after an earthquake and weak economic growth strained the government’s finances.
The agencies are taking a harder line on any form of debt in the wake of the global financial crisis. Countries such as Ireland, which was forced to bail out banks after the global recession, have demonstrated how private debt can easily become a problem for the government.
The downgrade weighed on the New Zealand dollar. It was trading late Friday at $0.7639, down from $0.77 the previous day. It was worth as much as $0.88 two months ago.
In its review, Fitch said New Zealand’s high level of external debt is “an outlier” among comparable developed nations, a situation which is likely to continue given that the current account deficit is projected to increase. A current account deficit typically shows that a country is spending more than it earns and relying on borrowing to make up the gap.
Standard & Poor’s cited increased spending by the government following February’s earthquake that killed 181 people and devastated the center of Christchurch, New Zealand’s second biggest city.
According to S&P, negative factors include the country’s high levels of household and agricultural debt, its reliance on commodities for income, and an aging population.
“Rising savings will be an important component for keeping the country’s current account deficit in check,” said S&P analyst Kyran Curry.
New Zealand has a poor track record of personal savings, something that recent governments have attempted to address with a voluntary retirement contribution scheme called KiwiSaver. The latest downgrade will likely increase pressure on the government to make the scheme compulsory.
New Zealand’s Finance Minister Bill English defended the country’s economic performance. In a statement, he said the government has been attempting to reduce foreign debt, which remains the country’s “biggest economic vulnerability.”
“New Zealand’s private savings have started to increase and as a result we have started to reduce our total external debt,” English said. “But it still remains high.”
International liabilities have decreased from 86 percent of GDP two years ago to 70 percent of GDP in the year ending June, according to English.
In its review, Fitch pointed to some positive features of the New Zealand economy, which it listed as moderate public debt, fiscal prudence, and strong public institutions.
New Zealand remains rated AAA by the third major rating agency, Moody’s.
