Rating agency Standard and Poor's may have delivered a surprise ratings outlook reduction, but its core messages had substance, BNZ markets economist Stephen Toplis said yesterday.
S&P lowered its foreign currency sovereign credit rating outlook for New Zealand to negative from stable.
It said the AA+ rating was at risk from the "widening external balances and the country's weakened fiscal flexibility".
"With the New Zealand economy in a relatively good space, by global standards, this came as a significant surprise," Mr Toplis said.
"A shock made that much greater by the fact that S&P representatives had seemed fairly relaxed about New Zealand's lot when they were recently in the country."
Financial markets expressed that surprise with the New Zealand dollar falling more than a cent against the US currency immediately after the announcement and sovereign credit default swaps rising.
S&P "firmly" pointed its finger at New Zealand's significant net international liabilities and prospect of a rising current account deficit as its reason for concern, he said.
"We think its worries in this regard are well justified and are at the heart of the current debt surrounding New Zealand's savings shortfall.
"The fact that the fiscal outlook has deteriorated has added to this angst."
It was one thing to have a current account deficit but another to have twin deficits and that was where New Zealand found itself, Mr Toplis said.
The most bemusing aspect of the release was that the rating agency believed the New Zealand economy would grow only 1.6% in 2011. That was well below the BNZ expectation of 3.5%, the consensus view of 3.2% and the Reserve Bank's "miserable" 2.5%.
Where the S&P number came from was anyone's guess but given the recent track record of the ratings agencies, one questioned their view anyway, Mr Toplis said. However, the view had to be noted.
Finance Minister Bill English said the rating change highlighted the need to reduce the country's heavy reliance on foreign debt. That was a long-standing problem for New Zealand and had left the country vulnerable.
At about 156% of disposable income, New Zealand's household liabilities were 50% higher than 10 years ago.
Banks and the Government, which were borrowing in volatile international financial markets, faced higher interest costs on their increasing debt.
In the past 10 years, New Zealand's net foreign liabilities had risen from about $90 billion to more than $160 billion.
Labour finance spokesman David Cunliffe said National had no-one to blame but itself for the ratings change.
S&P was worried that updated forecasts due to be released next month would show growth forecasts being revised downward.
Strong action was required to lift economic growth and tax receipts, targeting tax cuts where they were needed while dealing with New Zealand's savings problems, he said.
Instead, National's tax cuts pandered to its wealthy constituencies and added billions to the public debt. National also cut KiwiSaver and suspended contributions to the New Zealand Superannuation Fund.
"It has taken a gob-smacking two years to even set up a committee to look at the massive savings gap that Labour has consistently highlighted as a crucial need," Mr Cunliffe said.
What it means
• S&P places NZ AA+ foreign currency rating on negative outlook.
• Moody's still has NZ on highest possible rating of Aaa.
• Rating downgrade usually increases interest-rate costs.
• Twin deficits are main concern.
