WELLINGTON: Moody’s Investors Service says that New Zealand’s economy is growing relatively strongly, despite a steep fall in dairy prices during the past two years. Construction, partly in relation to the ongoing rebuilding of Christchurch after the 2011 earthquakes but also in the Auckland housing market, has been an important contributor to this growth.
After an increase of more than 3% during 2015, growth appears set to remain relatively robust through 2016, with net immigration at record levels and tourism performing strongly.
The strong economic profile is reinforcing government finances, the government’s operating balance having returned to a small surplus in 2014-15 and only a small deficit is forecast for this fiscal year.
In addition, the ratio of government debt to GDP has stabilized at a level well below the Aaa sovereign median and is likely to decline over the next several years. As a result, New Zealand’s Aaa rating has a stable outlook. Moody’s conclusions were contained in its just-released, Government of New Zealand — Aaa Stable. The report is an annual update and does not constitute a rating action.
The Credit Analysis elaborates on New Zealand’s credit profile in terms of Economic Strength (Very High); Institutional Strength (Very High (+)); Fiscal Strength (Very High (+)); and Susceptibility to Event Risk (Low (-)). These are the four main analytic factors in Moody’s Sovereign Bond Rating Methodology.
The report says that New Zealand’s most important vulnerability is the structural current account deficit, which has been relatively large for several decades. This deficit means that the country as a whole is highly dependent on the international capital markets.
We expect the current account deficit to be below historical averages for a few years, somewhat reducing New Zealand’s external vulnerability. Nonetheless, its net external liability position will remain the highest among Aaa-rated sovereigns.
In recent years, the steep increase in government debt was credit negative for New Zealand, although Moody’s rating remained unchanged. In the future, should there be a reversal of the government budget balance and the trend in the debt ratios, the rating could come under downward pressure. However, our baseline case is that debt ratios, after stabilizing, will be on a declining trend.
The Moody’s report further points out that, despite sustained 2.0-3.0% growth in 2011-2015, the track-record of stable near-potential growth will likely give way to higher growth volatility when labor-input tailwinds subside.
Over the long run, however, we see no structural impediments for continued consumption-driven expansion. So, while the strength of some of the tailwinds that supported consumption growth in the past decades, such as credit deepening, greater integration into international trade, and high employment levels may be subsiding, we still expect them to play a leading role in driving New Zealand’s economic growth going forward.
On the issue of the agricultural sector, after benefiting from a positive price shock in 2013 and early 2014, it has become further entrenched as the main source of export revenue for New Zealand, although tourism is catching up in terms of its share of total foreign-exchange earnings.
In the 12-month period ending December 2015, agriculture, forestry, fishery, food and other animal- or plant-originated products represented 72% of total merchandise exports, up from 65% in 2010 and 59% in 2000.
While more concentrated in its foreign trade than most other developed economies, and, therefore, more exposed to terms of trade shocks, New Zealand demonstrates some degree of diversity among individual groups of products within its largest segment of exports.
Despite a high share of milk products — over one third of agricultural and related exports — New Zealand compares favorably to highly rated Gulf Cooperation Countries whose exports tend to be concentrated in a single product rather than a range of products.
With an estimated 2015 GDP of US$171.3 billion, New Zealand is the second smallest Aaa-rated issuer in Moody’s sovereign portfolio after Luxembourg and the sixth smallest in the Aaa-Aa range. However, at over 400% of the global median for nominal GDP, its economy can still be characterized as medium sized in a global context.
