As a chorus of voices urges the Government to drop its self-imposed debt limit, Thomas Coughlan discovers that the ratings agencies would be relaxed about higher debt.
The big three credit rating agencies have spoken out on the Government’s budget responsibility rules, each confirming they would not be immediately bothered if the Government loosened them.
The Government can currently borrow at 2.8 percent, which is lower than even the American Government’s borrowing costs, but those low borrowing costs may not last beyond the 2020 election because central banks are ending the money printing programmes that have driven long-term interest rates lower globally since 2009. The European Central Bank and Bank of Japan are still creating money out of thin air to buy their own Governments’ bonds. That money is then recycled into other country’s bond markets, including New Zealand.
The New Zealand Government could essentially choose to borrow that freshly printed money now at very cheap rates to build the infrastructure needed to cope with the population shock of the last five years, but the Government is sticking to its pre-election pledge to reach National’s debt limit of 20 percent of GDP, albeit taking a couple of years longer than National.
One agency, Standard & Poor’s, told Newsroom that the Government could loosen the debt limit rule from 20 percent to 30 percent of GDP before triggering a lower debt assessment.
This would equate to an extra $35 billion of borrowing for infrastructure, enough to build six light rail projects, or an additional 53,856 of the most expensive KiwiBuild homes, or 15 more sub-hunting P-8A Poseidon aircraft — if the Government was that way inclined.
Back in the spotlight
The Government’s budget responsibility rules were dragged back into the media spotlight this week after a chorus of voices urged they should be scrapped if the Government wishes to plug the growing infrastructure deficit.
Critics of the rules argue that the self-imposed target of reducing net debt-to-GDP to 20 percent by 2021/22 will mean the country’s pressing infrastructure needs will be left wanting.
Acting Prime Minister Winston Peters jumped into the melee on Monday, telling journalists that the rules could be gone before the end of the current three-year term.
Now, the rating agencies have added their voices to the fray, saying that they would not be spooked by additional borrowing — quite a lot of borrowing, in fact.
The three agencies, Moody’s, Standard & Poor’s, and Fitch are perhaps the most important authorities on Government debt.
They periodically issue ratings of Government debt indicating the quality of the country’s debt and how likely it is to repay. Investors watch their ratings closely and many bond fund managers are not allowed to invest in bonds below a certain rating.
New Zealand has relatively high credit rating. It has an Aaa from Moody’s and an AA+ rating from both Standard & Poor’s and Fitch.
Our good credit rating means we can borrow more cheaply as investors feel confident that New Zealand will repay them when the bonds mature. Countries like Greece with credit ratings in the ‘Bs’ face much higher borrowing costs as investors don’t have the same level of confidence.
They like us — they really, really like us
New Zealand is popular with the rating agencies. None of the big three, when spoken to by Newsroom, said they were concerned with the level of debt in New Zealand.
Anthony Walker, Standard and Poor’s sovereign analyst for New Zealand, said some additional debt would not immediately trigger a rating downgrade.
“Our next threshold is 30 percent,” said Walker.
“A lower debt assessment means 30 percent net debt to GDP,” he said.
This would not itself trigger a downgrade, as debt only accounts for 1/6th of the overall rating. If the rest of the economy was performing well, New Zealand could still keep its high rating — as well as around $35 billion worth of new infrastructure, based on 2022 GDP projections.
‘Higher debt with strong growth a good mix’
Walker said it would be possible to increase the level of debt and still run a better fiscal position, leading to a strong rating.
“Depending on how the economy performs, you could have a 25 percent target and still run a better fiscal position, depending on how strong economic growth is,” he said.
The other rating agencies were likewise confident that New Zealand could add to its debt burden without triggering alarm.
Matthew Circosta, Analyst for New Zealand for Moody’s, said the debt position here was relatively modest.
“Whether it is net debt at 20 or net debt at 25 as a share of GDP, that wouldn’t concern us,” Circosta said.
Jeremy Zook, Associate Director of Asia Sovereign Ratings at Fitch, told Newsroom that “a couple of percentage points wouldn’t impact the rating”, given the country’s strong position relative to its peers in the AA rating range.
Much lower debt than others
Fitch forecasts New Zealand’s gross debt to GDP ratio will be slightly below 30 percent of GDP in 2019. The median debt level for other AA sovereigns is 41 percent of GDP.
Fitch and Moody’s both use gross debt, rather than net debt for their ratings (unlike Standard & Poor’s and the Government, which use net debt).
“A few percentage points likely wouldn’t have a large impact particularly given its relative position to the median,” Zook said.
Zook was supportive of a debt target as an “anchoring device,” but had no comment on where the target should be set.
All the agencies were sympathetic to the Government’s argument that it must keep its debt position relatively solid to brace for unexpected shocks, although this did not change their outlook on New Zealand’s capacity to borrow more.