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Rating Agencies wait and watch

From all accounts, the National Government’s second annual budget since it came to power in November 2008 has impressed tax experts, private sector organisations and even the public, for its promised tax reforms and other measures.

But it did not encourage international credit rating agencies to change their outlook, with almost all of them saying that they would “wait and watch.”

However, the agencies appeared to have a more positive approach to New Zealand and were appreciative of the fiscal initiatives of the Government.

The Building Recovery Budget 2010 has a mixed bag of taxation (GST rise and removal of depreciation on properties including rentals for instance) and prudent and not so prudent spending cuts but given the challenges facing the economy, Finance Minister Bill English has proved the point that fiscal management is no child’s play.

Ballooning Deficit

With Crown Operating Expenditure slated to move up to $70.65 billion during the current budget year (increasing to $77.04 billion by 2014), there is a risk of external debt getting out of hand.

The bottom-line budget deficit for fiscal 2010 would be $7.07 billion, higher than the December 2009 estimate of $5.13 billion.

The core operating balance, excluding investment gains and losses, is forecast to register a deficit of $8.63 billion for fiscal 2011, again higher than the December estimate of $6.68 billion.

The wider core deficit is largely due to lower-than-expected tax revenues and the expected initial impact of the budget’s tax changes.

Financing costs and one-off expenditure items are also expected to weigh heavy.

According to the Treasury, New Zealand’s fiscal deficit will account for 6.5% of the Gross Domestic Product for year-ending June 30, 2011, but would shrink to 4.5% in 2012 and 3.3% in 2013.

It said net debt would peak to 27.4% of GDP in 2014-2015.

The projections also show that public debt will meet the long-term target of 20% of GDP in 2021-2022, which would be a “substantial achievement” given the size of the shock New Zealand endured during the global slowdown.

“The Crown Accounts would be back in surplus by 2016.”

Agencies Monitor

While the Budget arguably appeases most segments of the population and is investor-friendly, the need to “look out” for international credit ratings agencies is stronger now than ever before.

Mr English said the fiscal policy of his Government was “strong enough for any credit rating agency to remove its negative watch and that the medium-term outlook for the economy is unambiguously better.”

The Budget may constrain the Reserve Bank of New Zealand to consider lifting the interest rate and review its Monetary Policy in the light of ballooning external debt, which Prime Minister John Key hoped would not happen.

International Credit Rating Agencies were apparently not impressed.

Fitch Ratings said the Government’s intention to reduce the budget deficit was a step in the right direction but found it insufficient to remove its negative outlook of the sovereign rating announced in July 2009.

The Agency’s Asia Director Ai Ling Ngiam told Dow Jones Newswires that “one budget would not change the negative look.”

“We need to conduct a more holistic assessment,” he said.

Fitch lowered the outlook on New Zealand’s foreign-currency rating to negative from stable last summer, saying it had concerns about the country’s growth outlook, current-account deficit and overseas liabilities.

Its current rating is AA-plus.

But Standard & Poor’s left its credit rating of AA+ debt rating untouched, saying that the country’s credit was well supported by sound public finances and open and transparent policies.

The firm’s Credit Analyst said, “The outlook has improved since the last budget and there remains an achievable and believable path to return the operating position to surplus, although the forecast deficit for 2011 is large,” she said.

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