New Zealand Yields Surge as Currency Slumps on Rating Cuts by Fitch, S&P

By Tracy Withers and Chris Bourke - Sep 30, 2011 1:02 PM GMT+0700
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New Zealand’s dollar slid for a third day, declining to 76.93 U.S. cents as of 1:38 p.m. in Wellington from 77.10 cents yesterday in New York, when it dropped as much as 1.5 percent. Photographer: Mark Coote/Bloomberg

New Zealand lost its top credit grades at Standard & Poor’s and Fitch Ratings, the first Asia- Pacific nation in a decade to have its local-currency debt cut from AAA. Government bond yields rose by the most this year.

The outlook is stable after the long-term local-currency rating was reduced one level to AA+ and foreign-currency debt was cut to AA from AA+, S&P said in a statement. New Zealand’s dollar extended its biggest quarterly drop since 2008 after Fitch announced similar moves yesterday. Both credit assessors cited concern that government and household debt is expanding.

Joining the U.S. and Italy among nations suffering ratings cuts in 2011, New Zealand was hit by earthquakes in the past year that strained government coffers. Bond yields surged on concern investors will sell New Zealand debt, adding to the case for Reserve Bank Governor Alan Bollard to hold record-low interest rates after the economy almost stalled last quarter.

“New Zealand now is ‘under scrutiny’ because of the debt troubles offshore,” said Helen Kevans, an economist in Sydney at JPMorgan Chase & Co. “The fact that further stress in global financial markets could hamper New Zealand’s funding ability appeared among the major catalysts driving the decisions.”

Currency, Bonds

New Zealand’s dollar slid for a third day, declining to 76.72 U.S. cents as of 6:03 p.m. in Wellington from 77.10 cents yesterday in New York. The currency has weakened 7.5 percent since June. Ten-year yields rose 11 basis points, or 0.11 percentage point, to 4.42 percent, the biggest climb since Nov. 18, 2010.

The downgrade “follows our assessment of the likelihood that New Zealand’s external position will deteriorate further at a time when the country’s fiscal settings have been weakened by earthquake-related spending pressures and fiscal stimulus to support growth,” S&P said in its statement.

New Zealand’s economy grew 0.1 percent in the three months through June from the previous quarter, less than the 0.5 percent growth that economists predicted, a government report showed on Sept. 22. The jobless rate has stayed above 6 percent since the second quarter of 2009, compared with the 4.8 percent average over the past decade.

The ratings companies announced their decision midway through the Rugby World Cup, which New Zealand is hosting through Oct. 23. The central bank forecast the tournament, with an estimated 95,000 visitors, will boost spending by about NZ$700 million ($538 million).

Cash Rate

Bollard on Sept. 15 left the official cash rate at a record-low 2.5 percent for a fourth straight meeting, saying worsening global economic and financial risks made it prudent to stay on hold. Twelve of 17 economists surveyed by Bloomberg News expect the rate will be unchanged until next year.

Increased funding costs, “through a further tightening in financial conditions, would delay any interest-rate hikes from the RBNZ,” Philip Borkin, an economist at Goldman Sachs & Partners New Zealand Ltd., said in a note to clients.

New Zealand’s 10-year bond yield is 244 basis points more than the equivalent U.S. note, with the spread widening from a one-month low of 227 on Sept 27. The premium New Zealand 10-year bonds offer over similar-maturity Australian government debt rose 13 basis points to 18, the biggest increase since Sept. 8.

Fewer AAAs

The cuts on New Zealand’s debt reduce the number of nations with AAA local-currency ratings from all three risk assessors to 14, with Australia, Canada and Singapore the only non-European issuers in that group. The AA foreign-currency rating is Fitch’s third-highest grade, leaving New Zealand at the same level as Japan and Kuwait, and below Spain and Australia.

Moody’s Investors Service reaffirmed New Zealand at Aaa for both local and foreign-currency debt in May.

“We’re the only highly rated country with a two-notch gap between our Moody’s rating and Standard & Poor’s,” Finance Minister Bill English told reporters today. “Two of them at least now take the view that despite the fact the position has improved and there’s a plan in place for it to continue improving, they are more sensitive to it.”

The downgrades highlight that New Zealand is vulnerable to global financial turmoil because it remains a highly indebted country, English said.

‘Matter of Time’

“It must be only a matter of time before Moody’s at least attaches a negative outlook to New Zealand” in its rating, said Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore.

S&P carried out an unprecedented cut of America’s credit rating on Aug. 5 to AA+ from AAA for both local- and foreign- currency debt, helping spur the S&P 500 Index toward its biggest quarterly drop since 2008. U.S. Treasuries have gained 6 percent this quarter, the largest advance since 2008.

New Zealand’s net external debt of 83 percent of gross domestic product in U.S. dollar terms at the end of last year compares with the median of 10 percent for AA-rated nations, Fitch said. The current-account deficit, the widest measure of trade because it includes services and investment income, is likely to widen to 4.9 percent of GDP in 2012 and to 5.5 percent the following year, Fitch said.

New Zealand’s ranking was cut in part because the sustained shift in the domestic savings-to-investment ratio required to narrow the current-account shortfall is “unlikely within the forecast period,” Fitch said. The country’s 150 percent household indebtedness relative to disposable income compares with 157 percent in Australia, 159 percent in the U.K. and 116 percent in the U.S.

Surplus Planned

The country’s ratings remain supported by the government’s aim to return to budget surplus in 2015, Fitch said. That timetable could be set back by upwards revisions to estimates of damage from a Feb. 22 earthquake in Christchurch that killed 181 people, it said.

Foreign investors owned about NZ$32 billion of New Zealand government bonds at Aug. 31, or about 63 percent of the total outstanding, according to central bank figures. The government yesterday sold a record-equaling NZ$1 billion of bonds, receiving bids totaling NZ$1.53 billion.

To contact the reporters on this story: Tracy Withers in Wellington at twithers@bloomberg.net; Chris Bourke in Wellington at cbourke4@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net