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Rating Action:

Moody's affirms New Zealand's Aaa ratings; maintains stable outlook

21 Sep 2018

Singapore, September 21, 2018 -- Moody's Investors Service has today affirmed the Government of New Zealand's Aaa long-term issuer ratings. The outlook remains stable.

The Aaa rating and stable outlook are underpinned by Moody's expectation that New Zealand's very strong institutions will continue to define the framework for highly effective policymaking that prevents or mitigates the credit implications of potential external and domestic shocks. In particular, the government's strong fiscal position and monetary policy flexibility provide ample capacity to counter shocks.

New Zealand's Aaa local currency senior unsecured debt rating, (P)Aaa senior unsecured MTN rating, local currency other short-term and foreign currency commercial paper ratings at Prime-1 are also affirmed.

New Zealand's long-term local and foreign-currency bond and deposit ceilings remain at Aaa. The short-term foreign-currency bond and deposit ceilings remain at Prime-1.

RATINGS RATIONALE

RATIONALE FOR RATING AFFIRMATION AT Aaa

VERY STRONG INSTITUTIONS WITH HIGHLY EFFECTIVE POLICYMAKING TO MITIGATE EXPOSURE TO SHOCKS

The very high strength of New Zealand's institutions is a key factor underpinning New Zealand's Aaa rating. It manifests in very high government and policy effectiveness to respond to both gradual changes in the economic or social environment and sudden shocks.

New Zealand's fiscal institutions have a strong record of managing shocks through effective fiscal policy, while demonstrating fiscal discipline over the long term. Fiscal metrics improved swiftly in the aftermath of the 2008 recession and the 2011 Canterbury earthquake; they continued to improve through the downturn in commodity prices from 2014-2016 and the Kaikoura earthquake in late 2016. The central government's gross debt fell to 26.5% of GDP in 2017 from a recent peak at 31.3% in 2012.

Moody's expects the coalition government comprising Labour Party, New Zealand First and the Green Party, elected in September 2017, to remain committed to fiscal discipline, as shown in the budget's projections for continued fiscal surpluses and government debt reduction. In line with the government's projections, Moody's forecasts that the budget will remain in surplus and that gross central government debt will edge down to 26% of GDP in 2019 and likely fall further thereafter, significantly lower than many other Aaa-rated sovereigns.

This provides ample fiscal flexibility to respond to both long-term spending needs related to social demands or a potential sudden rise in expenditure to support the economy in a downturn or address the costs of a natural disaster. For instance, this policy space gives flexibility to fund higher spending on families and other social benefits, infrastructure, affordable housing and education — including through the government's "Living Standards Framework" — while keeping the broad direction of fiscal policy unchanged.

Meanwhile, New Zealand's monetary institutions have a demonstrated record of maintaining price and financial stability, which lowers the probability of economic or financial shocks materialising and provides policy flexibility to respond to such shocks should they occur.

The Reserve Bank of New Zealand (RBNZ), the central bank, has retained significant conventional monetary policy space (the official cash rate is at 1.75%) to shore up the economy through a downturn. Moreover, its timely macroprudential actions, including the implementation of loan-to-value ratio (LVR) restrictions in 2013, 2015 and 2016, are proving effective in lowering house price inflation and stabilising household debt ratios, albeit from high levels. Price growth for detached houses moderated to 6.6% year-over-year in the first quarter of 2018, down from double-digit rates witnessed from mid-2015 to early 2017. Moreover, household debt (including rental properties) remained steady at 166% of household disposable income in the second quarter of 2018 for a sixth straight quarter. Further, strong capital buffers for banks reduce the financial stability risks related to a potential downturn in the housing market.

POLICY SPACE AND EFFECTIVENESS REDUCE THE CREDIT IMPACT OF POTENTIAL SHOCKS

The very high strength of New Zealand's institutions and, relatedly, Moody's expectation that any fiscal or economic policy response would be proactive and effective, diminish the credit impact of various potential shocks that the country is exposed to. New Zealand's exposure to shocks relates to its reliance on external financing and its small and open economy, that is dependent on agriculture exports to drive growth and incomes.

The economy's net international investment position will remain negative and large for the foreseeable future. Although the liability position has diminished to 54.6% of GDP in June 2018, from 59.3% in 2016, and is around its lowest levels as a share of GDP since the late 1980s, it remains sizeable and exposes New Zealand to a sudden tightening in external financing conditions. In Moody's view, the RBNZ's track record of credible and effective policy and the government's similar track record of fiscal prudence significantly lower the likelihood that a sharp tightening in external financing conditions would persist.

Meanwhile, natural disasters which New Zealand is exposed to or shocks to the agriculture sector could have a material negative impact on GDP growth. This could halt or, in the event of a very severe shock, potentially reverse the downward trend in the government's debt burden that Moody's currently expects. The very strong starting point on fiscal metrics and New Zealand's fiscal institutions indicate that the probability of a large and lasting weakening in fiscal strength is highly unlikely.

RATIONALE FOR STABLE OUTLOOK

The stable outlook is anchored by Moody's expectation that, even in the face of shocks, New Zealand's credible institutions with highly effective policymaking and ample policy space will maintain economic and financial stability and credit metrics consistent with a Aaa rating.

WHAT COULD CHANGE THE RATING DOWN

As implied by the stable outlook, a negative rating action is not likely in the near term.

Over the long term, Moody's would consider downgrading the rating if a large external or domestic shock, such as stemming from a natural disaster, a long-lasting shock to its agriculture sector or a sharp housing market correction for instance, were likely to result in a sustained upward trend in government debt. If such a scenario impaired access to external finance, the health and stability of the banking system could be damaged. Such outcomes would imply significantly diminished institutional strength compared with our current assessment.

GDP per capita (PPP basis, US$): 38,934 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.7% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.6% (2017 Actual)

Gen. Gov. Financial Balance/GDP: 1.6% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.9% (2017 Actual) (also known as External Balance)

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 18 September 2018, a rating committee was called to discuss the rating of New Zealand, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthew Circosta
Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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