(Bloomberg) -- S&P Global Ratings is “broadly comfortable” with New Zealand’s sovereign rating outlook, though it’s closely watching the nation’s large current-account deficit and weak economic growth.
The company has the South Pacific nation’s foreign currency debt at AA+ on a stable outlook. That’s the same level as the US, Austria and Finland.
“Stable outlook means it’s unlikely that the rating will change over the next two years,” Martin Foo, director of sovereign ratings, said in an interview on Wednesday in Wellington. “Of course, we can’t rule it out. It’s just that’s where we see the trajectory.”
New Zealand’s current account deficit was 6.8% of gross domestic product in the 12 months through March after swelling to as much as 8.8% in late 2022. The gap is among the widest of advanced economies, reflecting subdued exports, stronger-than-expected imports and debt servicing costs, Foo said.
“The widening of the current-account deficit and the fact that it stayed quite elevated has been a little bit of a surprise,” he said. “Our base case is that it will narrow to something like 5% of GDP over the next couple of years. But if it doesn’t, that’s going to be probably a downside trigger for the rating.”
S&P is also expecting another benchmark it monitors — GDP per capita — to recover in coming years as interest-rate cuts start to revive the economy. The gauge has fallen for six consecutive quarters as economic growth has lagged a population surge.
“It’s our base case that growth starts to pick up, especially with monetary easing finally having arrived,” said Foo. “But if for whatever reason, that GDP per capita number doesn’t pick up, that is also I think a downside risk to the sovereign rating.”
S&P expects the government’s overall deficit, which combines its operating balance and infrastructure spending, to narrow in coming years. In May, the government projected a small operating surplus in 2028.
Pressure on the fiscal balance comes from both the revenue side, which is linked to the soft economy, and tax collections, as well as the continuous challenge of curbing government spending, Foo said.
“It’s the nature of politics nowadays that it can be difficult to rein in spending,” he said. “As long as the government tracks reasonably to those projections of a narrowing deficit, then the rating is okay.”
©2024 Bloomberg L.P.
