New Zealand's economy is growing strongly, despite a steep fall in dairy prices during 2014, according to Moody’s, adding that the construction sector, partly in relation to the rebuilding of Christchurch after the 2011 earthquakes, and also in the Auckland housing market, has been an important contributor to growth.
As a result, Moody's expects New Zealand's real GDP to rise to close to 3% during 2015 and to remain robust through 2016.
The rating agency said New Zealand's strong economic profile is reinforcing government finances, with a return to budget surpluses expected in the 2015-16 fiscal year and thereafter.
As for the stable outlook for New Zealand's Aaa rating, Moody's said the outlook reflects the fact that the country's ratio of government debt to GDP has peaked at a level well below the median for Aaa sovereigns and is likely to fall over the next several years.
Moody's report said that when compared to other similarly rated sovereign issuers, New Zealand's economy has demonstrated a track record of faster and more stable growth, which counterbalances its economic weaknesses, namely the small size, high concentration and relatively low income levels in comparison to other Aaa-rated sovereigns.
The economy also benefits from stable growth in aggregate labour input and strong private investment. As a result, the country has seen consistently high GDP growth rates over the past two decades, ranking third in terms of average GDP growth in its rating category.
On the other hand, Moody's also points out that New Zealand's most important vulnerability is its structural current account deficit, which has been large for several decades. This deficit makes the country highly dependent on international capital markets.
The government's projections indicate that the current account deficit will rise from its recent relatively low level to a high level once again during the coming few years. Part of the increase will be mitigated by reinsurance payments resulting from payouts related to earthquake reconstruction. The net international investment position will therefore not deteriorate to the extent indicated by the current account deficit.
On private consumption growth rates, Moody's report says that after gaining momentum in recent years, growth in consumer demand will likely come under pressure in the short run, as the country's external position and currency weaken.
Household consumption has on average contributed 170 basis points to quarterly year-over-year growth since 2010, slightly exceeding the contribution of gross capital formation and making it the primary growth driver during the period.
Moody's new report notes that New Zealand's banking sector is among the most resilient in the world. The sector is characterised by high concentration, with the four largest banks accounting for 84% of total loans and 91% of deposits.
Despite moderate competitive pressures, the banks have not drifted toward riskier business models and were able to maintain sound loan portfolios even in the wake of the global financial crisis in 2008-09 and the Christchurch earthquakes.
While less capitalised than the banking systems of several other Aaa-rated sovereigns, New Zealand banks' capitalisation ratios are broadly commensurate with the low riskiness of their loan portfolios. In addition, the banking system demonstrates some of the highest profitability levels in its peer group, minimising the likelihood of capital erosion in the near-term.
