New Zealand’s AA+ Credit Rating May Be Cut, S&P Says

By Tracy Withers

Jan. 13 (Bloomberg) -- New Zealand’s AA+ foreign-currency credit rating may be cut if the nation’s current account deficit and overseas debt begin to curb growth and investment, Standard & Poor’s said.

The rating company affirmed the rating, though revised the outlook to negative from stable, according to a statement today. The AAA local-currency rating is affirmed with a stable outlook.

New Zealand’s dollar fell to a four-week low after the statement, which adds to signs that investors may turn away from an economy that is in a prolonged recession. A report earlier today showed business confidence has slumped to a 34-year low and the government last month forecast widening budget deficits over the next five years.

“It’s not going to be easy for New Zealand,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “They have a massive current account deficit and a sizeable budget deficit. These are two things that aren’t good to have in an environment when it’s a struggle to raise capital.”

New Zealand’s dollar fell to 56.45 U.S. cents at 2:40 p.m. in Wellington from 57.17 cents immediately before the S&P report and from 57.93 cents in late Asian trading yesterday.

Standard & Poor’s yesterday said it may cut Spain’s AAA sovereign rating, citing challenges facing the economy. On Jan. 9, S&P put Greece’s credit rating on watch for a possible downgrade and reduced the outlook on Ireland’s rating to negative from stable.

Australian Rating

Nations that have been downgraded from AAA previously include Japan, Sweden, Finland and Denmark. The rating company today affirmed Australia’s AAA rating.

“The negative outlook on the New Zealand foreign currency rating reflects the likelihood of a rating downgrade if external imbalances begin to pressure the country’s investment, growth, and fiscal performance,” S&P said.

New Zealand’s current account gap widened to 8.6 percent of gross domestic product in the year ended Sept. 30 as some of the world’s largest economies slumped into recession, driving down commodity prices and curbing exports.

The government last month forecast the deficit may start to narrow later this year as the recession crimps demand for imports.

“While the current account deficit is large and has been growing, it is likely to narrow somewhat in the next few years,” Finance Minister Bill English said in an e-mailed statement today. “While New Zealand’s credit rating remains very high, the position is not as comfortable as we would like.”

Business Confidence

The currency extended a decline sparked by a report that showed business confidence plummeted in the fourth quarter, matching a 34-year low seen in the second quarter last year.

A net 64 percent of companies surveyed last quarter expect the economy will worsen over the next six months, the New Zealand Institute of Economic Research said. The net figure is calculated by subtracting the pessimists from optimists.

The report added to signs that New Zealand’s first recession in 10 years, which began in the first quarter of 2008, may extend into the first half of 2009.

A net 43 percent of companies surveyed last month expect trading will slow in the first quarter, the most pessimistic since records began in 1970, the institute said. A net 49 percent say profits will decline in the next three months and a net 32 percent expect to fire workers.

The slump in spending and company earnings has curbed tax revenue and boosted welfare payments, pushing the government’s budget into deficits that are forecast to persist until at least 2013, English said last month. The budget cash deficit is forecast to be NZ$10.9 billion, or 5.6 percent of GDP, by 2011.

‘Market Confidence’

“Although we view such deficits as not uncommon given the cyclical weakening of tax revenue, market confidence may wane until policy makers articulate a plan for medium-term fiscal consolidation, given country’s external position,” S&P said.

“A credible medium-term fiscal plan combined with an easing of New Zealand’s external imbalances could, in our view, result in the ratings stabilizing at the existing levels,” S&P said. “Absent such developments, the foreign-currency rating could be lowered.”

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.