Second ratings agency flags concern over New Zealand’s fiscal path
Thursday, 23 April 2026
ANALYSIS: Moody’s has become the second major credit ratings agency to voice concern over New Zealand’s fiscal outlook by downgrading its rating outlook for government debt.
The agency joined fellow ratings agency Fitch in switching its “Aaa” rating from a stable to a negative outlook.
Explaining its decision, Moody’s said the risk that the Government would not “reverse the rising debt trajectory” had increased.
It forecast its own measure of government debt as a proportion of GDP would increase to almost 54% in the year to June, from about 49% last year and just over 25% in 2019.
Read more:
Fuel crunch and rising debt more reason to reform tax system
Treasury tips threatened NZ credit rating downgrade would have ‘marginal’ impact
Finance Minister Nicola Willis said the move was “another warning that we can’t afford to simply spend more and borrow more, or we risk higher interest rates, higher borrowing costs and more pressure on Kiwi families”.
Fitch voiced broadly similar concerns last month when it attached a negative outlook to its “AA+” rating for its rating of the Government’s foreign-currency sovereign debt.
The agencies use their own terminology to describe their ratings, so Moody’s “Aaa” rating and Fitch’s “AA+” can’t be directly compared.
Standard & Poor’s, the other — and perhaps best known — ratings agency out of the top three, has so far appeared more sanguine about the country’s debt levels, although it could change its rating at any time.
In a briefing at the start of the month, S&P Melbourne-based director Anthony Walker noted Fitch’s downgrade, saying there had been what he described as “some volatility recently amongst rating agencies”.
But he affirmed its stable outlook for New Zealand’s sovereign local currency and foreign currency debt ratings, explaining that was underpinned by New Zealand’s “wealthy economy and strong institutions”.
The country had enough debt headroom to continue to run “modest deficits”, he said.
If the Government continued to run annual deficits equivalent to 5% or 6% of GDP, that might not be consistent with S&P maintaining its “AA+/A-1+” rating on foreign-currency denominated debt, “but that’s not our base case”, he said.
In theory, ratings downgrades can have a direct consequence on the Government’s finances, and potentially those of other borrowers, by pushing up the interest rate they may need to pay to secure loans — but it is hard to measure.
The ratings agencies publish ratings to provide a guide to borrowers on how safe it may be to lend their money to institutions, with the theory being that the lower the rating, the higher the interest rate they should demand to compensate them for the risk of default.
In practice, it is difficult to isolate the exact impact they have on interest rates.
Last year, the Treasury advised The Post that previous market movements suggested an actual downgrade could add about $200 million to the annual cost of refinancing government debt, though it made clear there was a lot of room for error.
The process by which credit ratings are derived is far from an exact science and their history suggests there may be a strong degree of international relativity in the calculation.
S&P attached a lower rating to New Zealand government debt (down one notch at AA with a positive outlook) in 2018 when net core Crown debt stood at $58 billion — or 20% of GDP — than it does now when that debt was last measured at $188b or 42.3% of GDP.
In other words, curiously, the rating is slightly better now, even though debt is much worse.
While the ratings themselves may be a bit of a dark art and their direct consequences impossible to precisely quantify, upgrades and downgrades rarely fail to spark debate over the direction of the economy.
Willis’ comments suggest she intends to make the best of a bad situation with the ratings downgrade by using it to emphasise the wisdom of fiscal conservatism and caution on government spending.
Labour leader Chris Hipkins said the downgrade was “not good”.
Willis had said she was going to fix all this, but had increased government debt and the deficit, he said.
Some others, such as Tax Justice Aotearoa, have instead used the fiscal outlook to make the case that it is time for a frank conversation about additional taxes to steady the ship.