New Zealand's record current account deficit is significant in both a NZ and global context, and there are interesting comparisons to draw between 2023 and 2011 when S&P Global Ratings last downgraded NZ's sovereign credit rating, S&P's Martin Foo says.

The current account deficit, reflecting we're spending more than we're earning overseas, swelled to its highest dollar value of $33.8 billion last year.  As a percentage of Gross Domestic Product (GDP), showing its significance in the context of NZ's overall economy, it weighed in at 8.9%, the highest it has been since the 1970s.

Foo, director and analyst at credit ratings agency S&P Global Ratings, spoke to interest.co.nz in the latest episode of the Of Interest podcast about this and more.

Foo talks about why NZ's current account deficit is so big, why it could get worse before it gets better, what a country can do to try and reduce a current account deficit, explains S&P's existing NZ sovereign credit ratings, why NZ scores lowly in S&P's external assessment, NZ's international investment position, how S&P would signal a potential downgrade, whether an upgrade's possible, and S&P's assessment of last week's budget.

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 "We [S&P] are raising our collective eyebrows and raising some serious questions. The current account deficit is an indicator of underlying economic conditions, or underlying fiscal conditions, and we have to think about what's causing these record imports," Foo says.

"New Zealand's external metrics do look quite weak compared to other comparable countries right now. As a simple example, last month the International Monetary Fund released its world economic outlook and the current account deficit at 8.9% of GDP was actually the largest of any advanced economy with the possible exception of Greece. Perhaps what's more interesting is the IMF is projecting that the deficit will stay quite elevated at about 8.6% of GDP in 2023, which would make New Zealand the worst performer on this particular metric."

S&P upgraded NZ's sovereign credit ratings in February 2021. They're now an AA+ foreign currency rating and a AAA local currency rating, both with stable outlooks. They're the highest and second highest credit ratings S&P issues. (In the podcast Foo explains what foreign and local currency ratings are).

S&P last downgraded NZ in September 2011, lowering the foreign currency rating one notch to AA, and the local currency rating a notch to AA+. Foo says there are some interesting comparisons between then and now.

That was a long time ago and the world was a very different place but there are some striking similarities to what's happening today. 

"New Zealand was facing a rising current account deficit and that was occurring in conjunction with earthquake related spending pressures, as well as fiscal stimulus to support growth. And if you look at today's situation, if you substitute the word 'earthquake' with the word 'cyclone,' then you have a situation that's airily familiar."

Nonetheless Foo says S&P still sees NZ as having "very, very strong credit metrics."

"We currently have New Zealand on a stable outlook. If we were to move we would typically signal that with a change of outlook, perhaps to negative. Right now we're still comfortable with the stable outlook," Foo says.