Treasury tips threatened NZ credit rating downgrade would have ‘marginal’ impact

Wednesday, 28 May 2025

The chances of the country’s sovereign debt credit rating being downgraded appear to be growing, but the Treasury believes that would have only a marginal impact on the Government’s debt-servicing costs.

A previous market movement suggested a downgrade could add about $200 million to the annual cost of refinancing government debt, though with a lot of room for error.

Finance Minister Nicola Willis revealed on Budget Day that the Treasury now expects net core Crown debt to top $238 billion in June 2029, about $4b more than it had expected debt to reach when it compiled its previous forecast in December.

The Treasury is also now forecasting only a minuscule surplus of $214m in the June 2029 year, even once ACC’s deficit is excluded, down from its previous prediction of an already small ‘ObegalX’ surplus of $1.9b.

ANZ described the deterioration in the Government’s fiscal outlook as “small”, but credit ratings agency S&P appeared less relaxed about the forecasts, saying on Budget Day that the country was “straining to improve its public finances” in the wake of the Covid pandemic.

S&P currently assigns an ‘AA+/Stable/A-1+’ rating to the Government’s foreign-currency denominated debt and an ‘AAA/Stable/A-1+’ rating to its New Zealand dollar bonds.

But it cautioned that only a slow improvement to the country’s “twin” fiscal and current account deficit, when coupled with tepid growth in the economy and productivity, “could diminish buffers for the rating”.

That appears to open the door to S&P at least attaching a negative outlook to the existing ratings, which can be a precursor to an actual downgrade.

An S&P spokesperson said its outlooks on credit ratings assessed the potential direction of a long-term credit rating over the “intermediate term”, which was generally taken to be up to two years.

A downgrade could be expected to push up the interest costs on government debt, though a Treasury spokesperson made clear it would always be difficult to isolate the impact.

“It is not possible to definitively quantify how much of a market move is based on a particular catalyst, compared to other influences on the market.”

But for a “highly rated sovereign like New Zealand”, the impact on interest costs of a one notch downgrade by a ratings agency was likely to be “marginal” relative to other factors that could impact interest costs, such as “global dynamics” and Reserve Bank decisions, he said.

There were many global studies on the impact credit ratings had on interest costs, but those normally looked at “extremes” and the Treasury would be wary of drawing direct parallels with New Zealand, he said.

New Zealand last experienced a ratings downgrade in 2011 in the wake of the Canterbury earthquakes.

The Treasury noted in December that had been followed on the day by an increase of about 10 basis points on the yield of long-term government bonds.

“The market had likely already priced-in increased risk from the weaker risk factors that led to the downgrade, weaker New Zealand business confidence was released the same day and, due to usual global market volatility, it is difficult to determine how much of the increase in yields was sustained,” it said then.

S&P said in its Budget Day note that population growth and inflation might make it difficult for New Zealand to adhere to a tight budget.

“Core Crown” spending still accounts for more than one third of GDP, well above pre-Covid levels, suggesting it has been difficult to unwind pandemic-era emergency fiscal settings, it said.

But it nevertheless expected debt to stabilise “at a favourable level compared with that of most of its highly-rated peers”.