Moody's confirms NZ govt can spend more and keep Aaa rating

The Labour-led coalition is committed to reducing net debt to 20 percent of GDP by the year to June 2022. Photo by Maddie Grieveson

New Zealand has "room to manoeuvre" in fiscal spending and there is no immediate downside pressure on its Aaa rating, said Matthew Circosta, sovereign analyst for Moody's Investors Services, a global credit rating agency.

The Labour-led coalition is committed to reducing net debt to 20 percent of GDP by the year to June 2022 from around 22 percent currently but spending pressures are increasing as it focuses on improving living standards and looks to shore up major infrastructure. As a result, Finance Minister Grant Robertson has come under pressure to ease the so-called budget responsibility rules that tie him to that target.

Circosta said one of the key things underpinning New Zealand's rating is its institutional strength - which is rated at very high plus - and its fiscal strength. While he acknowledged the potential for some "fiscal slippage" as the government targets things like health, education and social welfare spending, "the broader point is that there is room here to manoeuvre."

According to Circosta, the focus on improving living standards, in addition to maximizing growth and employment outcomes, "underscores the institutional capacity of the government and also the fiscal flexibility it has to be able to implement these types of measures."

He said the rating would only be threatened if both institutional strength and fiscal strength were to markedly deteriorate.

Circosta was also upbeat about New Zealand's economic growth and said the growth outlook is "relatively stable." His comments contrasted with the central bank that yesterday held rates at a record low 1.75 percent and said it now expects to keep them lower for longer on concerns about softer-than-expected economic growth.

"We don't see it (the economy) building as quickly as we did before, so we are going to have to continue to support it for a bit longer," deputy governor Geoff Bascand said.

According to Circosta, however, while growth has softened somewhat it remains "well-placed" at around 2.5 percent on average over the next two years.

"That is still relatively strong when you look at New Zealand's growth in relation to peers," he said, noting the median among the 12 Aaa-rated sovereigns is 2.4 percent.