Fitch: New Zealand budget surplus underscores positive outlook

The unexpected budget surplus posted by New Zealand for the fiscal year ending June 30 (FY15) underscores the Positive Outlook on the sovereign's 'AA' rating, says Fitch Ratings.

New Zealand's FY15 operating balance before gains and losses (OBEGAL) came to a surplus of NZD414m. This was the first OBEGAL surplus since 2008 and was well above the deficit of NZD684m predicted in the May budget. Tax revenues were NZD559m higher than government expectations, while expenditures were NZD495m lower.

Higher nominal GDP growth of 2.8% in the fiscal year (versus 2.4% forecast) was a key factor driving revenue growth. Fitch believes that some of the improvement in revenue may be sustained into FY16. But the outlook for the dairy sector, and the implications for the wider economy, will be an important determinant of revenue growth. Real GDP growth is expected to slow in the second half of 2015 as earlier cuts to dairy supply feed in. But the strong rebound in dairy prices over the past few months will support GDP growth in nominal terms.

Downside surprises on the expenditures side though, are unlikely to be maintained. Delays in earthquake reconstruction spending around Christchurch and treaty settlement payouts for Maori groups were key factors resulting in lower-than-expected expenditures in FY15. But this is likely to lead to higher government spending in FY16. Fitch continues to expect the FY15 general government budget, which includes local government accounts, to remain in deficit under Government Finance Statistics (GFS) principles developed by the International Monetary Fund.

Nonetheless, the surprise OBEGAL surplus reinforces New Zealand's Positive Outlook, and underscores Fitch's expectation for deficit reduction to continue and public debt to decline after 2017. Fitch's assessment of the trajectory for New Zealand's public debt has not changed materially as a result of the latest figures. Gross general government debt (estimated by Fitch using GFS statistics) was 35.7% of GDP in 2014, which was in line with the 'AA' median, but well below the OECD median of over 70%.

New Zealand's fiscal outlook remains sensitive to global economic conditions and dairy prices in particular. The economy remains sensitive to a negative external shock, including a rapid rise in external borrowing costs and/or prolonged weakness in the dairy sector.