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Ratings agency Standard & Poors has warned that New Zealand’s credit rating could be reduced if the Government’s current account deficit does not improve and interest costs rise substantially to more than 10% of government revenues.
The Government deficit is the amount that spending exceeds revenues.
It reached $2.8 billion in six months to the end of December, which was $39 million more than forecast.
Core Crown tax revenue was $375 million or 0.7% below forecast at $54.5b, while core Crown expenses were $411 million, or 0.7%, above forecast at $60.5b.
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Net debt was 21.6% of GDP, slightly above the forecast of 21.3% of GDP.
New Zealand’s credit rating can affect how expensive it is for the country to borrow money internationally.
It is currently AA+, indicating very low credit risk.
The current deficit is at an extremely high level, Anthony Walker, a director of sovereign ratings at S&P told news agency Bloomberg.
“It is catching our attention, the persistently weak and worsening current account position of the New Zealand sovereign, particularly given that it has been quite weak the last year or two and our forecasts are for it to narrow.”
ANZ senior economist Miles Workman said the deficit was the widest in the history of the data.
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Things will improve but potentially more slowly than previously expected, Miles Workman says.
He said cyclone impacts meant the current account deficit was expected to improve at a slower pace than previously. That made New Zealand more vulnerable to global risks that could materialise via the terms of trade.
“New Zealand isn’t the best saver in the world, meaning it’s an economy dependent on foreign capital to meet some of its investment demand. The result: persistent current account deficits, which have tended to run at around 3% to 4% of GDP in ‘normal times’. Provided this foreign capital is put to productive use, running a deficit may not be a bad thing as it can grow the economic pie, making all parties better off.
“But when the deficit widens, as it has in the wake of the pandemic, there is a greater risk that foreign capital is allocated less efficiently than otherwise. Should something go wrong and foreign creditors reassess the risks, New Zealand may find itself needing to live within its means very quickly, or face potentially unsustainable borrowing costs. In other words, both private and public sector activity could face a sharp adjustment, damaging confidence.”
But he said ratings agencies should keep in mind that reopened borders and monetary tightening weighing on imports would help lower the deficit.
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Economist Shamubeel Eaqub says the deficit is high but not near the trigger for a downgrade.
Economist Shamubeel Eaqub said the threshold for a downgrade was high.
“On the government interest costs, It’s currently less than 3% of tax revenue. The trigger for a downgrade is 10% of tax revenue. On the current account deficit, much of the recent widening was due to the trade balance rather than the cost of servicing foreign debt. And also reflects a lot of global inflation we are importing.
“While the current account deficit is 9% – which is high – it’s still quite far from the 20% trigger. The issue for us has always been on our over reliance on foreign savings to boost our investments. The current account deficit is equal to the gap between our investments and savings – which we must pay for using savings of other countries.”
He said it was usually not a problem because investments would increase the country’s earning power.
”But our investments have been biased toward buying houses from each other at ever higher prices. This makes us feel richer but doesn’t create sustained increase in jobs and incomes, not does it fix our infrastructure and other deficits.
“While this is a risk, New Zealand tends to borrow in NZD, or swap out foreign borrowing into NZD. Meaning our reliance on foreign borrowing is not as big a problem as it was in the 1980s for example – or the sudden loss of confidence that has afflicted many emerging markets.”
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