New Zealand Rating Outlook Revised to Negative by S&P, Snapping Kiwi Rally
Reserve Bank of New Zealand governor Alan Bollard
Mark Coote/Bloomberg
Alan Bollard, governor of the Reserve Bank of New Zealand.
Alan Bollard, governor of the Reserve Bank of New Zealand. Photographer: Mark Coote/Bloomberg
New Zealand’s credit-rating outlook was lowered to negative by Standard & Poor’s, 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 today. 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 U.S., U.K. 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.”
New Zealand’s currency fell to 77.31 U.S. cents as of 5:07 p.m. in Sydney, having reached as high as 78.37 cents earlier today, from 77.87 cents on Nov. 19 in New York. Credit-default swaps on the nation’s debt jumped 8 basis points to 62.5 basis points as of 4:23 p.m. in Wellington, according to National Australia Bank Ltd. The increase is the biggest since May, according to pricing data compiled by CMA.
New Zealand Bonds
New Zealand’s 10-year-bond yield rose 8 basis points to 5.74 percent as of 5:06 p.m. in Sydney, the highest level in six months, according to data compiled by Bloomberg. Longer-dated New Zealand bonds are likely to underperform shorter-dated debt “as the market builds more risk premium” into securities with longer maturities, said Kerr.
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 2010 growth forecast to 2.6 percent from 3.1 percent and said the expansion will probably be slower in 2011. Last month Bollard 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 gross domestic product 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 today.
Government Reaction
Finance Minister 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.”
New Zealand policy makers are looking to exports, which make up 30 percent of the country’s $125 billion economy, to boost growth as domestic spending and housing remain sluggish. That strategy may be undermined by a strengthening exchange rate, propelled by the gap in rates with other advanced economies as the U.S. and Japan keep their benchmarks near zero percent.
The local currency, known at the kiwi, has appreciated 3.5 percent against the U.S. dollar the past month, the best performer of 16 major currencies tracked by Bloomberg.
“It would be unlikely at this stage to see a full downgrade as medium-term prospects remain positive through the links with New Zealand’s largest trading partners,” including Australia and emerging Asian economies, said Kerr.
Banking Vulnerability
The Reserve Bank of New Zealand 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 2009 following the nation’s budget.
To contact the reporter for this story: Michael Heath in Sydney mheath1@bloomberg.net
To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net
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