S&P: New Zealand credit ratings could come under pressure if current account deficit widens

"New Zealand’s credit grades with S&P Global Ratings could come under pressure if the nation’s current account deficit remains too big," reported Bloomberg early Wednesday morning in Europe.

The news quotes Anthony Walker, a director of sovereign ratings for Australia, New Zealand and the Pacific at S&P to mention that the deficit “is at an extremely high level at the moment,” and “much wider than we were expecting it to be.” 

Additional quotes

It is catching our attention, the persistently weak and worsening current account position of the New Zealand sovereign, particularly given that it has been quite weak the last year or two and our forecasts are for it to narrow.

New Zealand has AA+ foreign currency and AAA local currency ratings from S&P, but the agency has always pointed to the country’s external imbalances as a key risk.

Data Wednesday showed the current account deficit blew out to 8.9% of Gross Domestic Product (GDP) in 2022 as the nation imported more goods and services than it exported. 

S&P had forecast the deficit would be 6.7% in June last year and ease to 5.8% by mid-2023.

We would need to see the current account deficit narrow over the next 12 to 18 months and if it doesn’t there is going to be increased pressure on the AA+ rating.

New Zealand imports a lot of material and reconstruction work is going to mean more imports as well, so that could also play back to the weaker external position.

NZD/USD stays depressed

While tracing the downbeat news for NZD/USD, the Kiwi pair remains pressured around the intraday low of 0.6223 while snapping the three-day uptrend and reversing from a one-week high.

Also read: NZD/USD looks comfortable above 0.6200 amid softer US Dollar