Moody’s Discussed Stripping New Zealand of Last AAA Rating

Moody’s Discussed Stripping New Zealand of Last AAA Rating

Moody’s Investors Service considered stripping New Zealand of its sole remaining top credit rating amid concern the nation’s current-account deficit is exacerbating its vulnerability to external shocks. New Zealand’s reliance on overseas investors means it can face difficulties when crises such as the Christchurch earthquakes and Fonterra Cooperative Group Ltd.’s contaminated milk scare occur, Steven Hess, Senior Vice President at Moody’s in New York, said in an interview in Wellington today. The kiwi fell today to a four-week low.“New Zealand stands out as having the largest negative net international investment position” among the sovereigns holding the top score from the ratings company, Hess said. “So we discussed it, but we decided we should not downgrade New Zealand.”

Prime Minister John Key’s government is selling stakes in state companies to fund infrastructure and reduce debt. Moody’s is the only one of the three main ratings companies to still rate New Zealand AAA after Standard & Poor’s and Fitch Ratings each lowered their local-currency rankings one level on Sept. 29, 2011, sending the kiwi dollar plunging and spurring bond yields to their steepest climb in a year.

New Zealand’s dollar, named the kiwi for the image of the flightless bird on the NZ$1 coin, dropped to 82.13 U.S. cents, the lowest since Oct. 2, before trading at 82.31 cents as of 5:04 p.m. Wellington time.

Hess, in New Zealand to talk to government officials and private-sector clients, said Moody’s is due to review the country’s rating next year, when it will use a new methodology that puts more weight on countries’ external positions. Moody’s confirmed its stable Aaa rating for the nation on Sept. 2.

Current Account

New Zealand’s persistent current-account shortfall is reflected in a net international investment deficit equal to 71.4 percent of gross domestic product last year, according to Moody’s. That compares with a 56.3 percent gap for Australia and a 23.8 percent deficit for the U.S.

Foreigners trimmed their holdings of New Zealand government bonds to 67 percent of the total last month, from a 3 1/2-year high of 69.1 percent reached in May.

New Zealand remains exposed to potential shocks, such as earthquakes, and its small size and lack of diversity adds to the nation’s vulnerability, Hess said. He cited the case of Fonterra, whose exports to key markets such as China were temporarily halted in August after a potential botulism contamination. Auckland-based Fonterra is the world’s largest dairy exporter.

Dairy Exports

While the scare turned out to be a false alarm, it illustrated how New Zealand’s reliance on dairy exports could become problematic, Hess said.

“If there were a real event like that and suddenly New Zealand’s dairy products were not salable because they were viewed as contaminated — we’re not predicting that, but that could be one that might lead to a problem.”

Moody’s will also be watching New Zealand’s housing market given the central bank’s decision to put limits on low-deposit mortgage lending. “Obviously the Reserve Bank thought they should do something about it, so it’s something that needs to be monitored and we’ll be doing that,” Hess said.

He was confident that the government will get a handle on rising debt, even though its asset-sales program will produce “a bit less money than they originally envisaged.”

Gross government debt rose to 38 percent of GDP in the 12 months through June 2012 before easing to 37 percent in the 2013 fiscal year, official data show.

Hess said while New Zealand’s debt-to-GDP ratio was still below the average for AAA-rated countries, it has doubled in the past few years due to the global financial crisis and the costs of the Christchurch earthquake.

“The trend has not been very good,” Hess said. “We think that the government has a handle on this and will move back into surplus within the next two years, and therefore that debt ratio will begin to come down.”

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net