New Zealand Rating Outlook Cut to Negative by Fitch
New Zealand’s long-term sovereign credit rating outlook was cut to negative from stable by Fitch Ratings, which said it is concerned by the economic outlook and the size of the nation’s current account deficit.
The deficit is large and projected to remain above the level necessary to stabilize and reduce net debt, Ai Ling Ngiam, a Fitch sovereign analyst in Singapore said in a statement. New Zealand’s dollar fell after the report.
Finance Minister Bill English said yesterday the economy faces a “bumpy” road as it recovers from the worst recession in three decades. In May, he deferred income-tax cuts and trimmed spending to contain a budget blowout, prompting Standard & Poor’s to revise its credit rating outlook to stable from negative.
“A stronger fiscal adjustment than currently planned may be required to raise national savings and reduce the current account deficit, as well as structural reforms to improve productivity,” Fitch said in today’s statement.
New Zealand’s dollar fell to 64.00 U.S. cents at 4:55 p.m. in Wellington from 64.57 cents immediately before the statement was released.
New Zealand’s current account deficit was 8.5 percent of gross domestic product in the year ended March 31. The U.S. shortfall was 4.5 percent of GDP in the same period.
In May, the government forecast the first budget cash deficit in nine years and said the gap might widen to 6.9 percent of GDP by June 2011.
‘Twin Deficits’
“It’s a twin-deficit issue,” said Craig Ebert, senior economist at Bank of New Zealand Ltd individual health insurance. in Wellington. “It was okay when we ran a current account deficit because we had fiscal surpluses. Now we’ve got both in deficit it’s more of a structural worry.”
Prime Minister John Key yesterday said there has been insufficient investment in sectors of the economy that will boost exports and help narrow an “unsustainably large” current account deficit.
Reserve Bank Governor Alan Bollard this week said the New Zealand dollar, which has surged 17 percent the past six months, needed to be weaker to bolster exports
The currency “appears more responsive to global financial conditions than to domestic economic fundamentals,” Fitch said today.
The ratings company said low interest rates and an “accommodative” fiscal stance means households may not reduce spending and borrowing enough to reduce the current account deficit and the nation’s external debt to a safe level.
“Against this backdrop of external vulnerability, more aggressive restoration of public finances through fiscal prudence will be needed to raise the national savings rate to counter weak private savings.” Fitch said.
Fitch affirmed New Zealand’s foreign currency rating at AA+, its second-highest level. The local-currency rating was affirmed at AAA.
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