(Bloomberg) -- Some of New Zealand’s local councils are saddled with debt levels among the highest of their global peers and credit rating downgrades may be inevitable, S&P Global Ratings says.
“Most of the New Zealand council sector already carries negative outlooks, which means downgrades are quite possible,” Director Martin Foo said in an interview Wednesday in Wellington. “The overall trajectory of the sector in terms of credit quality is definitely negative.”
Many New Zealand councils have lagged in infrastructure maintenance and upgrades, particularly in fresh and waste water systems, but are now facing pressure to spend heavily as pipes fail. Debt levels have soared much faster than revenue even after many have cut costs and imposed double-digit increases in the land taxes paid by local residents.
Most New Zealand councils are rated AA, but S&P has downgraded four to AA- since June, citing the gap between spending and revenue. Foo said the average gross-debt-to-revenue ratio across 25 councils that S&P monitors is about 180%, which is more than double the ratio seen in comparable countries like Canada.
“Whatever the cause, some of those deficits that councils are running are, to put it bluntly, some of the largest that we’ve seen in the world,” he said.
‘Shuffling Items’
Besides raising taxes and cutting costs, councils have few options to close the gap. Some have stakes in local ports or airports they may sell, and there may be scope for some assets to be moved off balance sheets into special purpose vehicles.
The government’s water reforms will allow councils to shift assets and debt to separately controlled organizations, but if the ownership stays with the council then S&P will continue to include them in its credit metrics.
“It’s really just sort of shuffling items around on a balance sheet,” said Foo. “We’re waiting to see more details on that.”
Foo said a lot of councils have caps of their debt of 280% of revenue imposed by the Local Government Funding Agency, an entity that raises debt on their behalf. Now there is a proposal that some may be allowed to run their caps to as high as 350%.
“That could be good from a public policy perspective, because it allows those high-growth councils to catch up on bridging the infrastructure deficit,” he said. “But when we see debt ratios like that, New Zealand is very much the outlier for the entire developed world. Whether its 300% or 350%, I don’t know how to put it in any other way. It is extreme.”
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