Fitch lowers New Zealand outlook to stable, maintains sovereign AA rating

Ratings agency Fitch on Tuesday lowered its outlook on New Zealand's government bonds to stable from positive, while leaving the sovereign rating unchanged at AA. Citing a weaker near-term outlook for New Zealand's agricultural exports, particularly dairy, Fitch also revised the banking sector's outlook to negative from stable.
"Fitch has revised down its assessment of New Zealand's near-term growth prospects, as the outlooks for the prices of the country's agricultural exports have deteriorated," the agency said in a statement. New Zealand's gross domestic product (GDP) growth slowed to 2.3 percent in 2015, according to Fitch estimations, meaning the country was no longer out-performing its 'AA'-rated peers.
Fitch said it expected GDP growth to pick up to 2.4 percent in 2016 and to 2.6 percent in 2017, a slower pace than forecast in its July 2015 review. Fitch said it expected a slight rebound in business investment from its currently subdued level, and continued high net immigration levels to support consumption growth.
However, it said that would likely be offset by lower dairy production and slower residential investment growth. Uncertainty over migration rates and the impact of El Nino weather conditions were also risks to its forecast, Fitch added. Softer growth and weak inflation prompted New Zealand's central bank to cut its benchmark interest rate in December to match a record low of 2.50 percent.
The Reserve Bank of New Zealand (RBNZ) is expected to keep rates on hold this week, although pressure for cuts is building, in particular as the economy teeters on the verge of deflation. Fitch said the weaker growth prospects had translated into a slower-than-expected path of debt reduction. The banking sector revision was sparked by the impact of a second season of low dairy prices on the debt-servicing ability of farmers, with about half of the dairy sector estimated to be facing negative cash flow during the 2014-15 season, Fitch said.
"Delinquent loans have remained low so far, as banks have supported farmers deemed to be viable," it said. "However a prolonged period of low dairy prices could lead to a rise of non-performing loans (NPLs) from the sector, as well as sharper cutbacks in production and investment." It added that the banking sector's rating outlook remained stable, reflecting the sector's strong capitalisation, stable funding and high net interest margins, which provide a buffer for the banking system against dairy sector vulnerabilities.