Dagong Upgrades the Sovereign Credit Rating Outlook of New Zealand to Stable
Dagong Global Credit Rating Co., Ltd.
September 12, 2017
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided to upgrade the sovereign credit ratings of New Zealand to stable while maintaining the local currency sovereign credit ratings at AA+ and foreign currency sovereign credit ratings at AA. New Zealand’s political situation is stable, economic growth is accelerating due to domestic demand, risk in the real estate industry is managed under the country‘s policy control, financial surplus continues, and government debt is entering into a downward channel. Therefore, solvency in both local and foreign currency is stable.
The key reasons for upgrading the outlook of the sovereign credit rating of New Zealand are as follows:
1. The debt repayment environment remains stable, and the political situation in New Zealand is likewise stable. With years of governing experience and a good credit record, the ruling National Party of New Zealand is expected to triumph once again during the general election on September 23, 2017 so as to continue the strategic policy for Trade-oriented National Development, and vigorously promote welfare reform, fiscal consolidation and debt reduction. In addition, inherent risks in real estate are under control as the growth rate of housing prices has slowed down in the first quarter of 2017, which shows that policies to regulate real estate prices have attained initial success.
2. Short-term economic growth is slowing down, and the potential for medium- and long-term economic growth is limited by structural issues such as industrial planning and an aging population. 2016 witnessed New Zealand’s economic growth rising to 4.0%, owing to an increasing birth rate, immigration, and a low interest rate environment. In the short-term, it is expected that the growth of New Zealand will slow to 3.1% and 2.9% in 2017 and 2018, since the government will implement a tight fiscal policy and raise the minimum threshold of immigration, coupled with a slowdown in the economic growth of New Zealand’s major trading partners. In the medium- and long-term, economic growth is expected to average 2.5% throughout 2019-2023 as growth potential is limited by a low degree of integration into the global value chain, an increasingly aging population, as well as labor shortages.
3. The short-term will witness a burgeoning financial surplus and stable debt repayment sources. On behalf of faster growth, welfare reform, and fiscal consolidation policies, New Zealand attained a primary fiscal surplus of 1.2% in 2016. In the short-term, the income tax rates will be reduced slightly, and the government is committed to welfare reform and spending cuts. Meanwhile, unemployment benefits will additionally be cut as a result of falling unemployment. Given all these factors, New Zealand’s general government is expected to run primary fiscal surpluses of 2.2% and 2.7% in 2017 and 2018 without debt financing needs, thus producing stable debt repayment sources.
4. The declining of debt burden improves the government solvency. In the short-term, a continuing fiscal surplus allows New Zealand’s debt burdens to enter into the downward channel. It is expected in 2017 and 2018 that the debt burden of the general government will respectively fall to 30.0% and 29.2%. In the medium-term, the government will continue to reduce the debt burden. As a result, it is expected that 2020 will see a reduced debt burden below 20%. In addition, long-term debt accounts for over 90% of the total debt, indicating that the debt structure is reasonable.
Reasons to maintain the sovereign credit ratings of local and foreign currency are as follows. First, there continue to be some risks in the real estate credit market. Housing loans are an important component of loans granted by financial institutions in New Zealand, however the current loan-to-value ratio for housing loans is higher than the national warning level, and the debt-to-income ratio of new home buyers is also increasing. Second, there are still some external vulnerabilities inherent in the economy. The total external debt ratio is standing at a high level of 110.7% in 2016, and the continuing current account deficit in the short-term is not conducive to the accumulation of foreign exchange. Dagong will track any changes in the risk of rating factors of New Zealand and adjust its rating timely.