NZ faces rising financial system risks – S&P

Standard & Poor’s credit analyst Nico De Lange said the risk of a sharp correction in property prices has increased.

“And if prices were to fall steeply, New Zealand's structural external weaknesses - such as its persistent current account deficits, high levels of external debt, and exposure to commodity price fluctuations - will worsen the impact on the economy.”

This would lead to the cost of external borrowings rising and domestic credit conditions tightening.

The currency might also depreciate sharply, and economic growth would slow down.

All of which would result in lower income levels.

As a result, the ratings agency has revised New Zealand’s BICRA score to '4' from '3’.

The BICRA scale runs from 1, which is the lowest risk, to 10, which is the highest risk.

Standard & Poor’s  also cut its stand-alone credit profiles on New Zealand's big four banks, and lowered its ratings on seven New Zealand financial institutions.

While it affirmed the ratings on 11 financial institutions, it lowered the stand-alone credit profiles of six of these.

The agency said none of its ratings actions was due to higher existing or emerging risks specific to the institutions themselves.

However, Standard & Poor’s analysts also said their base-case expectation is that a sharp house-price fall is unlikely to take place, despite the increasing risks.

The agency believes that the heightened economic imbalances in New Zealand will unwind in an orderly manner.

It also noted that Auckland’ current house-price appreciation follows a period of restrained growth in private sector debt and national house prices from 2007 to 2011.