Standard & Poor’s (S&P) and Fitch Ratings both downgraded New Zealand’s sovereign rating yesterday, in a move the government said was “ugly,” but reflected wider turmoil in world debt markets.
Analysts said the downgrade made New Zealand only the second Asia-Pacific country after Japan to have its rating cut amid the Europe’s sovereign debt crisis.
Fitch cut New Zealand’s long-term foreign currency rating one notch to “AA” from “AA+” and the long-term local currency rating to “AA+” from “AAA,” with S&P following suit several hours later.
Both Fitch and S&P blamed New Zealand’s soaring external debt, which hit 70 percent of annual GDP in June, for the rating cut, with S&P also citing the huge cost of rebuilding earthquake-hit Christchurch.
New Zealand Finance Minister Bill English acknowledged the country faced a substantial burden rebuilding the city after the February quake which killed 181 people, but insisted government plans to reduce external debt were on track.
He described the downgrade as “ugly,” but said the sovereign debt crisis had effectively “moved the goalposts” in world debt markets, forcing the ratings agencies to take a harder line than previously.
“We are not immune to the global backdrop,” he said. “In particular, investors are now reassessing their appetite for debt, and credit agencies are taking a tougher stance.”
He found some support from Australian Foreign Minister Kevin Rudd, who said New Zealand’s downgrade showed all countries, no matter how remote, were affected by economic debates occurring in Europe and the US.
“The truth is that, as we enter the last months of 2011, we stand again at a critical point in economic history,” he told a function in Brisbane.
“A challenge the world will either respond to decisively. Or a challenge that will be allowed to linger, becoming harder and harder to contain the longer it is left to grow,” he said.
Fitch said New Zealand’s current account deficit, which reflects a structural imbalance between savings and investment, was set to climb to 4.9 percent of GDP next year and 5.5 percent in 2013.
S&P said New Zealand’s external debt was exacerbated by high household and farm sector debt, reliance on commodity income and an ageing population.
BNZ chief economist Tony Alexander said the country’s stubbornly high levels of external debt made it unique in the Asia-Pacific region and the downgrade was not a sign sovereign debt contagion was spreading to the region.
“I’m certainly not aware of any other countries in the region that are facing the prospect of a downgrade ... it’s not the beginning of some type of regional rot,” he said.
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