Liam Dann: Ratings upgrade a big tick for NZ, but what will it mean?

OPINION:

If anyone still needed proof that New Zealand’s pandemic response has been the right one for the economy, then yesterday’s S&P Global Ratings upgrade should suffice.

New Zealand is now the first developed nation in the world to receive an upgrade from the powerful credit ratings agency since the pandemic began.

S&P’s rating effectively determines the level of risk attached to investing in or lending to a nation.

Conversely it determines our cost of borrowing.

“We believe New Zealand is recovering quicker than most advanced economies because the country has been able to contain the spread of Covid-19 better than most others,” S&P said in a statement yesterday.

“We believe that New Zealand’s relatively better management of the pandemic means that its credit metrics are in a good position to weather potential deterioration’s associated with further negative pressures.”

That assessment even accounted for New Zealand’s infamous Achilles heel – a possible weakening of the real estate market.

S&P is forecasting GDP growth to head back above 3 per cent next year.

That is a resounding endorsement of the Government’s pandemic response and economic management to date.

Ratings agencies can get things wrong, of course – as they did in the Global Finance Crisis – but one thing they don’t do is play politics.

S&P doesn’t care which political party is running the country.

It doesn’t even care about the details of policy – hard lockdowns versus soft lockdowns or the timing of alert level changes.

What it cares about is the macro-economic result of all those policy choices.

It cares about our fiscal management, our growth prospects and the stability of our institutions’ settings.

It has delivered the current government a tick on all three.

So what happens now? Will borrowing get even cheaper?

The ratings upgrade will help keep a lid on government borrowing costs but it is unlikely to lower them greatly.

While the upgrade was certainly a strong endorsement of New Zealand’s pandemic response and economic performance, any shift in borrowing costs is likely to be marginal, said ASB senior economist Mike Jones.

One reason for that is that the ratings lift was already partially priced in by markets.

S&P had put New Zealand’s outlook on positive prior to the pandemic, which meant an upgrade was pending.

What was remarkable was that it has followed through with the upgrade despite the pandemic, Jones said.

New Zealand’s rating was put on “positive outlook” about two years ago.

That means regardless of the pandemic, S&P was due to make a call about now as to whether to upgrade, said Martin Foo, associate director, sovereign and international public finance at S&P Global Ratings.

While New Zealand’s sovereign debt position clearly deteriorated in nominal terms as we borrowed to get through the pandemic, our position when benchmarked against our international peers had actually improved.

“New Zealand seems to have struck the right balance,” Foo said. “It looks like, on most measures, things are doing much better than anyone would have dared to anticipate six or nine months ago.”

Higher sovereign ratings generally translate to lower borrowing cost for government.

But at the top of the ratings ladder, gains tended to be a bit more marginal, said ASB’s Jones.

New Zealand already had a very good rating and so the impact of an upgrade to an even better one will be smaller than it might have been from less favourable ratings.

On top of that there were conflicting forces at work on international debt markets.

There is growing optimism around pandemic recovery and central banks lifting official cash rates.

That has been pushing bond yields up in recent days. That’s likely to overwhelm the downward pressure the upgrade brings to local borrowing costs.

So there is unlikely to be any impact on the offshore borrowing costs for banks (and therefore our mortgage rates).

For the Government, the upgrade will likely just keep borrowing costs stable for longer.

Where there might be more impact on the cost of borrowing was for local bodies which had also been singled out in the upgrade, Jones said.

Six local councils – Greater Wellington Regional Council, Marlborough District Council, New Plymouth District Council, Taupō District Council, Wellington City Council and Whangārei District Council – all received a specific upgrade yesterday.

That reflected an “underlying credit strength” which was not shared by the other 18 New Zealand local bodies subject to S&P ratings.

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