Fitch puts New Zealand on notice and downgrades Queensland

The DMO's timing was fortunate, as the next day Fitch revised the outlook on New Zealand's 'AA+' sovereign rating to negative from stable. Fitch said the revision reflects its concern about the medium-term growth outlook for New Zealand, given its persistently large current account deficit and rising foreign indebtedness.

Fitch observed that despite the recession, the current account deficit remains large and is projected to remain above the level necessary to stabilise and reduce New Zealand's net foreign liabilities. In its opinion, a stronger fiscal adjustment than currently planned may be required to raise national savings and reduce the current account deficit, as well as structural reforms to improve productivity.

A Fitch sovereign rating outlook has a 12 to 24 month time horizon and implies (in this case) a greater than 50 per cent chance of a rating downgrade.

Fitch lowered the long-term local currency rating assigned to the State of Queensland to 'AA+' from 'AAA' and left the rating with a stable outlook. Fitch observed that the state's current budget and financial projections through 2012-2013 indicate a reduction in financial flexibility as it embarks upon an ambitious and sustained infrastructure investment program, complemented by higher levels of key public services.

These budgetary programs are being financed without a significant corresponding increase in tax revenue, which portends a rapid accumulation of debt over the forecast period. Consequently, the state is projected to migrate within a few short years from a low to a moderate tax-supported debt burden. The current downgrade reflects this reduction in financial flexibility at a time of heightened financial responsibilities, said Fitch.