Investor risk now higher in Australia than New Zealand

Published by Euromoney Country Risk

In June, ECR commented on Australia’s trend decline in Euromoney’s country risk survey, and noted the fact New Zealand was looking the safer bet despite its lower ECR score and inferior credit rating.

New Zealand’s score rose to 82.6 by the end of 2016, gaining 3.4 points over the year to rise above Canada, Germany, Finland and, notably, Australia, to eighth in the global risk rankings:

Australia slipped below New Zealand, to 12th place, towards the bottom of the tier-one (AA or higher) sovereign borrowers, thus extending its longer-term score decline.

Since 2007, Australia has lost 11 points in Euromoney’s risk survey, whereas New Zealand’s recent improvement means it has lost just seven points overall.

Yet Fitch and Standard & Poor’s maintain their views Australia is a triple-A borrower, with New Zealand rated lower on AA. Moody’s has both borrowers rated AAA.

Risk experts differ from the rating agencies. Political developments have contributed to their changing risk scores.

In Australia, prime minister Malcolm Turnbull called a double dissolution election (for both houses) in July, which had been aimed at resolving the legislative deadlock blocking his government’s policymaking.

However, his Liberal-National coalition lost 14 seats in the House of Representatives (the lower house) and now has just a single seat majority.

In the Senate, the government is also weaker, requiring an additional nine votes to secure a majority, which is three more than previously.

Therefore, far from improving Turnbull’s position his gamble has merely increased the risk of policymaking delays, and of a government collapse, which is highlighted by the lower risk-factor score for government stability.

ECR experts were also concerned by the sudden resignation of New Zealand’s popular prime minister John Key in December.

Claire Matthews, ECR expert and acting deputy pro vice-chancellor at the Massey Business School, says “the effect was to create much greater uncertainty about the election outcome in 2017 than had previously existed”.

However, Key’s centre-right government is riding high in the opinion polls, and he was swiftly replaced by Bill English – his long-serving deputy and finance minister – before the elections, to be held by November.

Besides, as Matthews acknowledges, New Zealand’s economy is still showing incredible strength, with solid GDP growth, low inflation and falling unemployment mitigating the housing crisis caused by population growth and earthquake damage.

“New Zealand’s economy is continuing to tick along fairly comfortably, which supports the improvement in the risk score,” she says.

Indeed, most of New Zealand’s economic risk factors strengthened in 2016, including the score for government finances, contrasting with Australia’s government finances score, which flatlined.

New Zealand’s general government gross debt burden is around 30% of GDP, and is falling. Australia’s has risen above 36% of GDP, and is rising, despite similar economic growth rates.

Meanwhile, Australia’s current-account deficit is predicted by the IMF to remain larger than New Zealand’s based on relative domestic demand and exposures to commodity export earnings, which is also determined by the types of raw commodities they export.

New Zealand even has a more favourable structural risk profile due to its superior scores for soft infrastructure and labour market/industrial relations.

Its debt rating and capital-access scores are similarly higher.

Both countries it should be remembered are low risk – tier one, in ECR speak – and while the divergence between the two might narrow as political risk heightens in New Zealand, its risk profile is stronger than Australia’s.

Its credit ratings should now reflect this.

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