Fitch Ratings Declares NZ's Foreign Currency IDR at 'AA'

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Fitch Ratings Declares NZ's Foreign Currency IDR at 'AA'

 Fitch Ratings Declares NZ's Foreign Currency IDR at 'AA'

Summary

  • Fitch Ratings Affirms 'AA' with positive outlook for New Zealand's Foreign-Currency IDR.
  • New Zealand’s economy is fairing far better than expected at the beginning of 2021.
  • Fitch Ratings considers the Labour Government’s fiscal plan appropriate and sound.
  • Fitch Ratings expects the RBNZ to hold steady with current policy for the next couple of years.

Fitch Ratings has recently confirmed New Zealand’s Foreign-Currency IDR as ‘AA’ while indicating a optimistic long-term outlook. AA indicates a very low default risk while the positive outlook indicates that the rating may be raised in the long-term to AAA (the highest possible Fitch rating). Fitch Ratings considers several important macroeconomic indicators when deciding on a score.

Rating considerations for New Zealand:

Economic expansion

New Zealand’s economic activity has rebounded spectacularly after the Covid-19 related depression. In fact, the economy has defied expectations and by December had increased by 0.4% (when it was predicted to shrink 1.8%). NZ has experienced a swift ‘V-shape’ recovery, rather than a slow climb out of recession.

Highlights of the recovery period, in November 2020 includes of the following-

  • Exports were down only 0.2% for the year on pcp,
  • Consumer retail spending in December were up by 5% the previous December,
  • By the end of the 3Q, GDP and job listings were nearly hovering around pre-Covid levels.

Fiscal responsibility and Government stability

The economic rebound can in part be attributable to the wage subsidy that supressed the rise in unemployment during the coronavirus triggered lockdowns, as well as the stimulus packages announced by the government in July (earmarking NZ$3 billion for infrastructure spending).

Must Read; Is New Zealand ready for more stimulus? Inflation data says yes, while property prices say otherwise

Now that the immediate threat of substantial economic downturn has been averted, the government is looking to take prudent measures to undo the fiscal damage it has sustained. Fitch Ratings evaluated the government’s plan to restore the books as credible and thus have confidence in its ability to regain a similar pre-Covid fiscal position in the medium to long term.

The Labour party’s success in gaining a majority in parliament at the 2020 elections also bolsters the stability rating of the NZ government and will help it to deliver on its fiscal policies.  

Monetary policy

Fitch Ratings predicted the RBNZ will not need to venture into negative nominal interest rates to further stimulate the economy. This not a certainty of course, but it is unlikely. If negative interest rates are implemented, Fitch Ratings would have to revaluate the stable ‘AA’ rating and the projected outlook.

The RBNZ dropped the Official Cash Rate to 0.25% in June 2020. Fitch Ratings expects the RBNZ to sustain this rate and make no movement in either direction for the next couple of years as the RBNZ’s Large Scale Asset Purchase scheme remains active.

Additionally, the low and predictable OCR, coupled with the reinstatement of the LVR by the RBNZ, helps to mitigate the risk posed by the high level of household debt in New Zealand. Households debt to income in NZ is currently ~164%. This value is high, but it is within a range acceptable to gain an AA rating from Fitch when the OCR is so low.

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