An Aaa international credit rating and hopes of eliminating the virus at home | Good news for New Zealand’s economy!

What is a sovereign credit rating?

Credit ratings emerged as credit relationships developed in market economies. They provide economic management agencies, financial institutions, investors and business partners with objective, impartial information on creditworthiness to strengthen management, avoid risk, optimise investment, promote sales and improve returns.

A sovereign credit rating reflects a country’s willingness and ability to repay its debts. Sovereign ratings cover a broad range of factors. Alongside analysing GDP growth trends, foreign trade, the balance of payments, foreign exchange reserves, the total amount and structure of external debt, government revenue and expenditure, policy implementation and other factors affecting repayment capacity, they also examine the fiscal burdens created by government policies.

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What does an Aaa sovereign credit rating mean?

Put simply, the higher a country’s rating, the more cheaply its banks can borrow. Conversely, a lower rating increases banks’ funding costs. Those costs ultimately affect what consumers pay to borrow from banks. New Zealand’s top sovereign credit rating therefore means:

• Markets are confident in the New Zealand Government’s ability to repay its debts, keeping both banks’ funding costs and New Zealand consumers’ borrowing costs low.
• After short-term fluctuations in foreign exchange markets, the New Zealand dollar will also face less pressure than other countries’ currencies.

In short, a high credit rating helps strengthen investors’ confidence in the New Zealand market and means the country can access more funding for economic recovery.

 

Moody’s endorses New Zealand’s economic support plans

As early as 2017, The New Zealand Herald reported that Moody’s analysts expected New Zealand to be among the fastest-growing Aaa-rated economies over the coming years. New Zealand’s performance over the past three years has borne out that prediction. In its latest report, Moody’s recognised and supported the following aspects of the New Zealand Government’s performance:

• Reduced government deficits and strong economic growth over the past decade;
• Timely and forceful pandemic control measures, demonstrating strong institutional capacity and the ability to devise emergency fiscal responses quickly.
• Large-scale central bank repurchases of government bonds, alongside increased government bond issuance, to ease conditions in domestic financial markets.
• A series of economic support and stimulus plans introduced after the country entered an effective lockdown.

Moody’s report concludes that although the pandemic has weakened New Zealand’s fiscal position, it has not seriously threatened the country’s fiscal strength. Instead, it has highlighted the Government’s flexibility and capacity to use fiscal policy to support its credit standing in an increasingly difficult global economic environment. In particular, New Zealand’s budget surplus and debt levels below those of most Aaa-rated countries provide ample fiscal room to maintain its Aaa rating, denoting the “highest credit quality” of debt.

 

 Several countries have been downgraded or face downgrades

Moody’s also released a report, Coronavirus and the Global Economy, warning that the pandemic would deliver an unprecedented blow to the global economy. Restrictions on consumer demand and prolonged production disruptions would both increase the risks of an economic downturn.

Moody’s had already downgraded countries including the United Kingdom, South Africa and Mexico. Although the United States retains its Aaa rating, Moody’s noted that its financial conditions continued to tighten substantially, and the US Government’s assistance packages had so far failed to prevent the situation from worsening.

Analysts say that as the pandemic continues to spread, a growing number of countries will face the risk of sovereign credit rating downgrades.

 

Expert says New Zealand could eliminate the virus

Meanwhile, there is encouraging news at home. At yesterday’s press conference, New Zealand Prime Minister Jacinda announced that confirmed and probable cases had only just exceeded 1000, whereas earlier modelling had suggested cases could exceed 4000 by last weekend. This clearly demonstrates that alert level 4 has been effective.

University of Otago public health professor Michael Baker was even more confident, saying that although the global pandemic outlook was bleak, “we could be among the first Western countries to no longer need social distancing”. New Zealand’s geographical circumstances make it possible to eliminate COVID-19 entirely within its borders. This means that, provided “New Zealanders strictly follow the rules, New Zealand is in a position to lift its domestic lockdown sooner than other countries”, allowing consumption and production to resume.

 

The best economic response is to unite against the pandemic

Commenting on Moody’s credit rating for New Zealand, Finance Minister Grant Robertson said: “New Zealand’s economy is well placed in this global crisis because our debt levels are very low compared with other countries and regions.” He also said the Government had acted decisively and boldly as the virus spread overseas. Alongside lockdown, it introduced wage subsidies, a business finance guarantee scheme, tax changes, a rent freeze, an increased Winter Energy Payment, income support and other measures. It would continue introducing support to sustain incomes and stabilise employment. These measures would help businesses restart quickly after weathering the crisis and support economic recovery. He said: “The Government will use this time to develop plans and determine the future direction of New Zealand’s economy.”

Grant again emphasised: “Our best economic response right now is to unite against the pandemic. We therefore need to ensure people’s needs are met during lockdown so they can stay home, break the chain of transmission and save lives.”