Earlier this week, risk aversion brought about by debt contagion issues in the euro zone pushed comdolls lower against the Greenback. But when credit rating agency Standard & Poor’s downgraded its outlook on New Zealand’s foreign currency rating from stable to negative, the Kiwi bears had more reason to party in the pip streets.
Now, I ain’t one to point fingers but I have a good feeling that the country’s high level of foreign debt isn’t the only culprit behind the negative outlook for New Zealand. Yes, its growing current account deficit and risks to its banking sector were cited as the main reasons for the downgrade, but there’s more to the story than that.
It’s no secret that New Zealand has been struggling with employment. Since 2009, the country has only recorded a net increase in employment twice out of seven quarters–stats worse than Shaq’s free-throw shooting! The unemployment rate currently sits at 6.4%, which is better than the second quarter’s 6.9%, but still a far cry from the sub-4% levels it consistently earned prior to the global recession.
Adding to its headache, the dim employment situation has caused both consumers and businesses to sit on their hands and keep from spending. In fact, prior to October’s surprise 1.6% uptick, retail sales failed to record any growth whatsoever for two straight months.
Let’s not forget the threats its export industry faces. The Kiwi has been rallying since July, which could make New Zealand’s exports less competitive in global markets. As if that weren’t enough, it also faces the possibility of weaker demand from China, a popular destination for its exports. China has recently been taking on monetary policy tightening measures, which many believe may sap demand for New Zealand’s goods in the coming months.
With this negative outlook for New Zealand’s finances, analysts say that there’s a one-in-three chance that the nation’s sovereign debt would actually suffer a downgrade. If this happens, the government could have a tougher time funding its deficits because of higher borrowing costs. Call me a party-pooper, but I have a feeling that folks over in New Zealand would feel discouraged from securing loans and swiping their credit cards if borrowing costs started rocketing.
Bear in mind that New Zealand’s economic rebound is still not set in stone. As I said, unemployment remains and households and companies are still hesitant to spend and invest. It doesn’t help that, because of the recent downgrade warning, Prime Minister John Key revealed that next year’s government budget would undergo some spending cuts.
Does this mean that New Zealand is gearing up for the A-word? *Gasp!*
Maybe, maybe not. If New Zealand decides to implement some austerity measures soon, it could derail their economic recovery. This possibility, along with the fact that risky assets are giving traders the heebie-jeebies lately, could be very bearish for the Kiwi.
However, Finance Minister Bill English remarked that the downgrade warning from S&P might just be a result of heightened concerns about debt problems all over the globe. Perhaps credit rating agencies are just being extra strict lately. Although some are still hopeful that New Zealand can dodge a debt downgrade, it can’t hurt to be extra careful and stay updated on their debt situation. I’ll keep y’all posted!