NZ councils' debt levels weigh on creditworthiness of Asia-Pacific region

New Zealand's increasingly indebted local and regional governments (LRGs) have eroded the overall creditworthiness of the Asia-Pacific region.

A report by S&P Global Ratings said Australia and New Zealand's higher inward migration rates, compared with other countries in Asia-Pacific, was adding pressure to infrastructure deficits.

"LRGs in New Zealand also face the additional burden because of weaker operating accounts and substantial increases in capital expenditure, including national water reforms and disaster-related reconstruction efforts," it said.

"This infrastructure push is resulting in higher debt levels and interest costs, which is weighing on the liquidity coverages of several LRGs.

"This follows our revision of the trend of the New Zealand local council sector's institutional framework to weakening from stable and the large increase in spending at individual councils."

All but three of 21 New Zealand councils with AA ratings had a negative outlook, but were still able to borrow at more attractive rates as a result of "an extremely predictable and supportive institutional framework".

The remaining four LRGs had a single-A (A) rating, which reflected their weaker eoconomic profiles, wider budget deficits and weaker liquidity assessments from the rest.

In addition, Horowhenua (A+), Upper Hutt City (A+) and Hamilton City (A+) each had negative outlooks, while Tauranga's (A+) outlook was stable.

While LRG ratings were under pressure, S&P Ratings director Anthony Walker said they would still be able to secure a favourable credit rating through the Local Government Funding Agency (LGFA), which recently affirmed its foreign currency rating at AA+ and AAA for local currency debt.

The LGFA currently lent about 97 percent of its portfolio to local councils.

"The LGFA rating is extremely important to New Zealand councils. It has been a fantastic vehicle that was set up over a decade ago. Its rating is extremely high. Its rating is equivalent to the New Zealand sovereign," he said, adding it operated much like a bank and had a stable outlook.

However, Walker said the increasing risk to LRGs remained a concern, given the debt burden some were carrying -- putting them at the weakest end of the scale.

"It does highlight that New Zealand councils in general are highly indebted, and the credit quality is deteriorating.

"It tells us there's significant fiscal pressure or financial pressure on the local government sector, either, whether it's through the crown imposing more standards, earthquake standards, water standards, whatever it may be, or councils themselves spending a lot of money on things that may not be as urgently.

"And these are the pressures we're not seeing across many other countries."

For example, Walker said, Australian and Canadian local governments did not have the same level of responsibity for infrastructure, which was carried by state and provincial governments.

"They have much more broad-based taxation powers in Australia and Canada, for example, than what you'd have in New Zealand for our council."