Moody's: New Zealand's credit profile reflects high economic resilience and strong fiscal metrics; vulnerabilities mitigated by effective institutions

Moody's Investors Service says that New Zealand's (Aaa stable) credit profile reflects the country's very high economic resilience, very strong institutions and policy effectiveness, and a strong fiscal position when compared with similarly rated peers.

Moody's says that global demand for New Zealand's agriculture and tourism-related products will stay robust. And investments in housing will rise, with the country showing solid — but slower — population growth that will support real GDP growth of around 2.5% in 2018 and 2019. Such a level of growth is above the Aaa median of about 2%.

New Zealand's credit vulnerabilities include its large reliance on external financing and banking sector risk related to high household debt. Nevertheless, the very high strength of its institutions and proactive implementation of macroprudential policies help mitigate these two risks.

Moody's conclusions are contained in its just-released credit analysis titled "Government of New Zealand - Aaa stable" and which examines the sovereign in four categories: economic strength, which Moody's assesses as "very high (-)"; institutional strength "very high (+)"; fiscal strength "very high (+)"; and susceptibility to event risk "low (+)".

The report constitutes an annual update to investors and is not a rating action.

Moody's points out that New Zealand's economic profile supports the newly elected coalition government's credit-positive commitment to preserving fiscal surpluses and reducing government debt further over the next five years.

The stable outlook on New Zealand's Aaa sovereign rating is anchored by Moody's expectation that New Zealand will maintain strong fiscal and monetary discipline that provide the economy and financial system capacity to adjust to shocks and keeps its credit metrics consistent with a Aaa rating, even in the event of such shocks materializing.

Moderate gross government debt levels of around 30% of GDP afford the government higher fiscal room than many other similarly rated high-income sovereigns to counter shocks.

However, Moody's could downgrade New Zealand's Aaa rating if a large external or domestic shock — perhaps from a natural disaster, a housing market correction or a sharp fall in global trade — results in more government debt that is not reversed in subsequent years. Such an outcome would imply diminished fiscal and institutional strength, and undermine the health of the banking system by damaging access to external finance.