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ingapore, April 21, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the Government of New Zealand's long-term issuer and senior unsecured ratings at Aaa and maintained the stable outlook. The (P)Aaa senior unsecured MTN program ratings, local currency other short-term and foreign currency commercial paper ratings at P-1 are also affirmed.
Moody's expects New Zealand's wealthy and highly competitive economy to continue its recovery, growing by 3.0% in 2022, from 5.0% in 2021. The economy demonstrated strong resilience in the face of the substantial shock of the Covid pandemic. New Zealand's institutions have extended their track records of effective and proactive policymaking in containing the short-term credit effects of the Covid shock. This has been achieved through highly effective use of a range of monetary policy tools, macroprudential adjustments and a substantial easing of fiscal policy. More recently, as economic growth has recovered and inflationary pressures have risen, policy has begun to normalise with repair of the fiscal metrics and tighter monetary policy to reduce inflation and support sustained growth. From a longer-term perspective, New Zealand's solid fiscal metrics will also allow it to respond to future shocks to growth. Effective policy making, including macroprudential policy tools, also enables management of New Zealand's longer-term vulnerabilities in terms of high household debt and high housing prices.
The local- and foreign-currency country ceilings are all unchanged at Aaa. The local currency ceiling at Aaa reflects New Zealand's relatively modest government footprint in the economy, predictable, reliable and effective institutions, limited political risks and a broad revenue base. Its external vulnerability on foreign financing for domestic investment is partially offset by the relatively high proportion of the country's liabilities that are denominated in New Zealand dollars. The foreign currency ceiling at Aaa reflects high degrees of policy effectiveness, a highly open capital account and an effective long-lived exchange rate regime. Additionally, the short-term foreign-currency country ceilings are P-1.
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RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
NEW ZEALAND'S ECONOMY CONTINUES TO SHOW RESILIENCE TO SHOCKS
Moody's expects New Zealand's economy to remain resilient, despite its vulnerability to shocks as a small, open and commodities-based economy. Moody's expects solid growth of 3.0% in 2022 as the economy continues to recover from Covid, even while fiscal and monetary policy begin to normalize in the face of domestic and external inflationary pressures. The economy's resilience reflects the economy's trade openness, highly competitive agricultural export base, flexible labor and product markets, high wealth levels, and the benefits of its ongoing net migration program. These attributes support New Zealand's medium-term growth potential of around 2.5-3.0%, a level higher than many advanced economy Aaa-rated peers.
Reflective of New Zealand's long-term resilience to shocks are its highly competitive primary industries which continue to invest in sustainable production processes and land use to support productivity gains. Services exports, predominantly tourism and education services have been significantly negatively affected by Covid related movement restrictions, but retain their strong competitive advantages. Easing of travel restrictions is now in train beginning with border easing for citizens and permanent residents, Australian residents and qualifying temporary work and student visa holders. In May, restrictions will be further eased for international travelers. Over 2022 and 2023 this should support modest recovery in the tourism and education sectors.
More broadly, New Zealand's competitiveness continues to be supported by its flexible exchange rate that responds quickly to improve terms-of-trade in times of shock, bolstering economic resiliency.
Moody's credits New Zealand's resilience in the face of the pandemic shocks as the reason they are maintaining its highest possible credit rating, pointing to our institutions' track record as effective managers through stressful times https://t.co/lhlnqxCwBl
— Elephant in the room (@LetsGetPfizered) April 22, 2022
STRONG INSTITUTIONS TO DRIVE FISCAL RECOVERY AND MACROECONOMIC POLICY NORMALISATION
Moody's expects New Zealand to rebuild significant fiscal buffers as the recovery continues in line with its strong record of effective macroeconomic management. New Zealand's track record of fiscal discipline before the pandemic provided a high level of flexibility, which was deployed to mitigate the impact of Covid on growth through policies including: healthcare-related spending, increases in social spending, wage subsidies, business tax relief and infrastructure investment. Fiscal deficits expanded to -5.3% of GDP in 2020 easing back to -0.8% of GDP in 2021. Moody's expects the deficit to rise to -4.7% of GDP in 2022 reflecting the lagged impacts of Covid related lockdowns followed by a significant decline into modest surplus in 2023. Deficit consolidation will partly be driven by the expiry of Covid related policy measures including health related spending and support for the labour market including wage subsidies, which were effective in supporting ongoing attachment to the labour market during movement restrictions, and Resurgence Support Payments, which played a key role in supporting households and firms. Strong nominal GDP growth on the back of the recovery in economic activity has also significantly boosted government revenues.
Moody's continues to assess New Zealand's ability and commitment to deliver on its medium-term fiscal policy framework and maintain debt levels at manageable levels to be very high. Over time, New Zealand's debt burden is likely to remain at low levels compared to similarly-rated sovereigns.
New Zealand's authorities have also begun to normalise monetary policy. The Reserve Bank of New Zealand has raised rates four times since October 2021, partly in response to domestic and imported inflationary pressures, demonstrating the authorities' ongoing commitment to macroeconomic stability in the medium term.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
NEW ZEALAND'S ECONOMY CONTINUES TO SHOW RESILIENCE TO SHOCKS
Moody's expects New Zealand's economy to remain resilient, despite its vulnerability to shocks as a small, open and commodities-based economy. Moody's expects solid growth of 3.0% in 2022 as the economy continues to recover from Covid, even while fiscal and monetary policy begin to normalize in the face of domestic and external inflationary pressures. The economy's resilience reflects the economy's trade openness, highly competitive agricultural export base, flexible labor and product markets, high wealth levels, and the benefits of its ongoing net migration program. These attributes support New Zealand's medium-term growth potential of around 2.5-3.0%, a level higher than many advanced economy Aaa-rated peers.
Reflective of New Zealand's long-term resilience to shocks are its highly competitive primary industries which continue to invest in sustainable production processes and land use to support productivity gains. Services exports, predominantly tourism and education services have been significantly negatively affected by Covid related movement restrictions, but retain their strong competitive advantages. Easing of travel restrictions is now in train beginning with border easing for citizens and permanent residents, Australian residents and qualifying temporary work and student visa holders. In May, restrictions will be further eased for international travelers. Over 2022 and 2023 this should support modest recovery in the tourism and education sectors.
More broadly, New Zealand's competitiveness continues to be supported by its flexible exchange rate that responds quickly to improve terms-of-trade in times of shock, bolstering economic resiliency.
Moody's credits New Zealand's resilience in the face of the pandemic shocks as the reason they are maintaining its highest possible credit rating, pointing to our institutions' track record as effective managers through stressful times https://t.co/lhlnqxCwBl
— Elephant in the room (@LetsGetPfizered) April 22, 2022
STRONG INSTITUTIONS TO DRIVE FISCAL RECOVERY AND MACROECONOMIC POLICY NORMALISATION
Moody's expects New Zealand to rebuild significant fiscal buffers as the recovery continues in line with its strong record of effective macroeconomic management. New Zealand's track record of fiscal discipline before the pandemic provided a high level of flexibility, which was deployed to mitigate the impact of Covid on growth through policies including: healthcare-related spending, increases in social spending, wage subsidies, business tax relief and infrastructure investment. Fiscal deficits expanded to -5.3% of GDP in 2020 easing back to -0.8% of GDP in 2021. Moody's expects the deficit to rise to -4.7% of GDP in 2022 reflecting the lagged impacts of Covid related lockdowns followed by a significant decline into modest surplus in 2023. Deficit consolidation will partly be driven by the expiry of Covid related policy measures including health related spending and support for the labour market including wage subsidies, which were effective in supporting ongoing attachment to the labour market during movement restrictions, and Resurgence Support Payments, which played a key role in supporting households and firms. Strong nominal GDP growth on the back of the recovery in economic activity has also significantly boosted government revenues.
Moody's continues to assess New Zealand's ability and commitment to deliver on its medium-term fiscal policy framework and maintain debt levels at manageable levels to be very high. Over time, New Zealand's debt burden is likely to remain at low levels compared to similarly-rated sovereigns.
New Zealand's authorities have also begun to normalise monetary policy. The Reserve Bank of New Zealand has raised rates four times since October 2021, partly in response to domestic and imported inflationary pressures, demonstrating the authorities' ongoing commitment to macroeconomic stability in the medium term.
POLICY IS FOCUSED ON LONG-TERM CREDIT RISKS INCLUDING EXTERNAL VULNERABILTIES AND HOUSING RELATED ISSUES
New Zealand's structural current account deficits, reliance on external financing, and elevated household debt drive the sovereign's moderate susceptibility to event risk.
New Zealand's external risks stem in part from its dependence on soft commodities and consequent vulnerability to changes in the commodity cycle as well as dependence on foreign financing of the current account deficit. While New Zealand's net international liabilities have generally narrowed in recent years, they remain large compared to Aaa-rated peers, which increases New Zealand's sensitivity to fluctuations in international investor sentiment. Nevertheless, the flexibility of its exchange rate, with more than half of its external debt denominated in local currency, and banks' relatively low reliance on short-term external funding help mitigate the credit impact of the economy's reliance on external financing.
Risks from elevated household debt and high housing prices remain, despite policies focused on the issue including tightening of mortgage lending standards and implementation of the Reserve Bank New Zealand's macroprudential regulations. Sequential tightening in loan-to-value restrictions and lower demand for housing during the Covid pandemic reduced riskier mortgage flows and contained house price growth. However, the more recent rebound in house price growth indicates that this risk will persist.
More broadly than household borrowing, while household debt remains elevated at nearly 100% of GDP, New Zealand banks' strong capital buffers mitigate the financial stability risks related to a potential downturn in the housing market. Structurally lower borrowing costs have also reduced households' debt servicing burdens and an ample stock of liquid financial assets provides buffers during economic downturns and periods of tighter monetary policy.
Reforms to address the credit risks associated with housing are ongoing, with a focus on the key long-term driver of housing prices, lack of supply. For example, financial incentives for local councils to lift the provision of the key infrastructure which in turn supports the incentives for construction of new housing developments should have a positive impact on potential housing land supply over time. Policy measures to constrain investor demand for the existing housing stock may also play a role in moderating price pressures.
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FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
As implied by the stable outlook, a negative rating action is unlikely in the near term.
Downward pressure on the rating would result over the medium term if a large external or domestic shock, perhaps a significant housing market correction or a sharp and prolonged period of weaker economic activity, resulted in a large and sustained increase in government indebtedness.
Such an outcome would imply diminished effectiveness and capacity to implement fiscal policy, as well as an erosion in the strength of institutions and governance no longer consistent with our current assessment.
A confluence of such factors may also undermine the health of the banking system by significantly damaging access to external financing, which would also be credit negative.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
As implied by the stable outlook, a negative rating action is unlikely in the near term.
Downward pressure on the rating would result over the medium term if a large external or domestic shock, perhaps a significant housing market correction or a sharp and prolonged period of weaker economic activity, resulted in a large and sustained increase in government indebtedness.
Such an outcome would imply diminished effectiveness and capacity to implement fiscal policy, as well as an erosion in the strength of institutions and governance no longer consistent with our current assessment.
A confluence of such factors may also undermine the health of the banking system by significantly damaging access to external financing, which would also be credit negative.
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