Fitch affirms Australia and S&P reviews New Zealand councils

Philip Bayley
Fitch Ratings affirmed the 'AAA/AA+' long-term local and foreign currency issuer default ratings it assigns to Australia, along with the 'F1+' short-term rating. The outlook on the ratings is stable.

Fitch said that the backdrop of global recession, heightened investor risk aversion and credit rationing presents some risks to Australia's macroeconomic imbalances of persistent current account deficits, heavy net external indebtedness and elevated household debt to income burden. The agency notes, however, that Australia's sovereign credit strengths, which include the government's long-standing fiscal prudence, the underlying strength and conservatism of Australian banks, well-developed financial markets and the free-floating exchange rate, have helped to counterbalance the risks arising from these macro-economic imbalances.  

Fitch forecasts the Australian economy will contract by 1.6 per cent in 2009, weighed down by a terms of trade shock and weak demand from households and corporates - which constitute 83 per cent of GDP. The government's strict fiscal prudence and public debt reduction efforts since 1998 now provide authorities with significant leeway to embark on an extremely aggressive counter-cyclical expansionary policy, in order to cope with Australia's first recession in 17 years.

Fitch notes that despite increased debt-financing in the short term, Australia's general government debt is forecast to reach 17 per cent of GDP by end-2009, well below the 'AA' median of 25 per cent. Over the medium term, Fitch anticipates the administration will fulfil its expressed determination to restore public finances to health when the economy recovers and grows above trend.

Standard & Poor's was busy reviewing its ratings on New Zealand councils last week.

A likely change in the governance structure of the greater Auckland area could see Waitakere City Council merge with Auckland City Council and six others. The possibly stronger credit quality of the merged entity led S&P to amend the outlook on Waitakere City Council's 'A+/A-1' credit ratings to positive from stable.

Unfortunately for Auckland City Council the outlook on its stronger 'AA/A-1+' credit ratings was revised to negative, as the credit quality of the merged entity may not be as strong as that of Auckland City Council.

Waitakere City Council has issued NZ$25 million of March 2012 bonds and Auckland City Council has some NZ$300 million of bonds outstanding with maturities ranging from September 2010 to March 2014.

According to our records, Christchurch City Holdings has some NZ$197 million of bonds on issue in the New Zealand domestic market with maturities ranging from July this year to November 2018. We have been unable to find any record of any international bond issuance.

Nevertheless, S&P affirmed the 'AA+/A-1+' local and foreign currency ratings that it assigns to the council,  but revised the outlook on the foreign currency ratings to negative from stable. (Foreign currency ratings are usually not mentioned unless there is a split between the local and foreign currency ratings of the relevant sovereign and the foreign currency rating of the counterparty is limited by the sovereign ceiling.)

The move brings the outlook into line with the outlook on the foreign currency rating of the New Zealand sovereign and rectifies an oversight.

Staying in New Zealand, the outlook on Transpower's 'AA-/A-1+' long- and short-term credit ratings was revised to negative from stable by S&P. The negative outlook reflects S&P's view that Transpower's financial flexibility has diminished due to the combination of necessary and significant capital works and the group's exposure to additional operating costs (reserve charges) because of the limited availability of its inter-island interconnector.