New Zealand’s credit-rating outlook was lowered to negative by Standard & Poor’s (S&P) Investors Service, spurring traders to buy protection on the nation’s debt and snapping a three-day rally in its currency.
“The main risk to the ratings would be a significant weakening in the credit quality of New Zealand’s banking sector,” S&P said in a statement yesterday.
The South Pacific nation’s AA+ rating, the second-highest grade, is the same level as Hong Kong’s in the Asia-Pacific region.
New Zealand is in danger of a “prolonged” struggle to recover from the global recession due to diminished demand for its goods and services in the US, UK and Japan, central bank Governor Alan Bollard said last week. S&P highlighted the danger of a widening current-account deficit that leaves the country increasingly dependent on foreign capital.
“It’s a very slow, fragile recovery,” said Jarrod Kerr, director of rates strategy at Credit Suisse AG in Singapore. “It’s just another warning shot for the government.”
Bollard said in a twice-yearly report this month that the recovery has been “tepid” and household spending remains constrained. In September, he lowered his growth forecast for this year to 2.6 percent from 3.1 percent and said the expansion will probably be slower next year. Last month he kept the benchmark interest rate unchanged at 3 percent.
S&P said New Zealand’s current-account gap is forecast to widen and average 5.9 percent of GDP over the next three years, from 2.9 percent in the 12 months to June, as the economy recovers.
“This implies further rises in New Zealand’s external financing needs that are already among the highest of any Standard & Poor’s-rated sovereign,” the company said.
New Zealand Minister of Finance Bill English said S&P’s move highlights the need to reduce the nation’s reliance on foreign debt.
“This is a long-standing problem for New Zealand and has left us vulnerable as a country,” he said in a statement. “The government is taking steps to reduce this external vulnerability and to move the economy towards savings and exports.”
The Reserve Bank of New Zealand (RBNZ) said this month that the reliance of the nation’s banking sector on short-term wholesale funding from international markets was exposed as a “key vulnerability” amid the global credit freeze.
“A further weakening in the recovery has the potential to generate further loan losses in the banking system,” the RBNZ said. “House sales have stalled for the past six months and there are signs of prices falling again. Were this to be accompanied by renewed weakness in the labor market, some mortgage borrowers would find themselves in a position of financial stress.”
New Zealand has 19 registered banks, according to the RBNZ, and the biggest four are all units of Australian lenders.
S&P had raised the outlook on New Zealand’s rating to stable from negative in May last year following the nation’s budget.
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