Sovereign Rating g g Methodology and New Zealands Credit Profile - - PowerPoint PPT Presentation

Fitch Briefing New Zealand 13 August 2013 g

Sovereign Rating g g Methodology and New Zealand’s Credit Profile

Andrew Colquhoun q Head of Asia-Pacific Sovereigns

Agenda Agenda

Concepts and Definitions Concepts and Definitions Key Rating Factors Global Economic & Sovereign Credit Trends

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Agenda Agenda

Concepts and Definitions Concepts and Definitions Key Rating Factors Global Economic & Sovereign Credit Trends

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Sovereign Issuer Default Ratings Sovereign Issuer Default Ratings

Forward-looking assessment on the sovereign government’s willingness and ability to service senior, unsecured debts in full and on a timely basis—the

Foreign Currency Ratings Local Currency Ratings

y Issuer Default Rating (IDR)

g y g

Take into account transfer and convertibility risk, and indicate probability of default on foreign d bt

y g

Risk of default on local currency denominated and local currency payable debt securities currency debts

All ratings have Positive/Negative or Stable Outlook (12-24 th h i ) month horizon) Rating Watches may also be applied (3-6 months)

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Sovereign Rating Concepts Sovereign Rating Concepts

• Local vs Foreign Currency Ratings
• Sovereigns do sometimes default on LC debt despite power to tax print money
• Sovereigns do sometimes default on LC debt despite power to tax, print money
• Ordinal measure of credit risk on the ‘AAA’ scale
• ‘AAA’ to ‘BBB-’ investment grade; ‘BB+’ to ‘D’ speculative grade
• Not tied to a numerical, ex ante probability of default
• Not a recommendation to buy/sell

F d l ki ti l th h th l

• Forward-looking, timely, through-the-cycle
• Issuer Default Ratings and ratings of debt issues
• Sovereign vs. Country risk
• Country risk is a broader concept relating to legal and governance risks (rule of law

etc) and transfer and convertibility risk

• Country ceiling
• Ceiling for other ratings in a country; relate to transfer and convertibility risk

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Fitch’s Rating Scales Fitch s Rating Scales

AAA

Investment Grade

BB+

Speculative Grade

F1+ AA+ AA B BB+ BB BB- F1 AA- A+ B B B- B+ F1 A A- CCC F2 F3 BBB+ BBB C CC C F3

Short Term Rating Long Term Rating

BBB- D

Short Term Rating Long Term Rating

RD/D

Note: +/- modifiers no longer used between CCC and C categories

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Sovereign Rating Methodology Sovereign Rating Methodology

• Structural Factors
• GDP per capita, economic diversification
• Financial system stability
• Governance, rule of law

35

Sovereign Ratings (August 2013)

Distribution of 106 rated sovereigns Countries

• Macroeconomic
• Sustainable growth without imbalances
• Rate and volatility of growth inflation

25 30 Rate and volatility of growth, inflation

• Public Finances
• Debt level and structure

10 15 20

• Budget deficits and trends
• Market depth, “reserve currency” status
• External Finances

5 10 AAA AA A BBB BB B CCC RD

External Finances

• External debt level, structure
• Current account, FX reserves, liquidity

AAA AA A BBB BB B CCC RD Source: Fitch Ratings

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Sovereign Rating Model (SRM)

• Rating model not sovereign default

Rating Factor Weights

• Rating model, not sovereign default

probability model

• Empirically based on indicators

Rating Factor Weights

Public Finances 29%

referenced in Fitch methodology

• 17 statistically significant indicators

29%

• Forward-looking, through-the-cycle
• Three-year averages used for more

dynamic variables, e.g. fiscal balance,

Structural

dynamic variables, e.g. fiscal balance, incorporating one forecast year

• Performance: 73% of actual ratings are

f S

Macro 9% Ext

Structural 49%

within one notch of SRM output

Source: Fitch “Sovereign Rating Model, September 2012

Finances 13%

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Issuer Default Ratings (IDR) Issuer Default Ratings (IDR)

Cumulative 5-year Probability of Default (ex post)

35 40 (%) 20 25 30

Investment grade Speculative grade

5 10 15 5 AAA AA A BBB BB B CCC

Corporate Sovereign

Note: Sovereigns data for 1995-2011, Corporate Finance data 1990-2011 Source: Fitch

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Country Ceiling Notching Factors Country Ceiling – Notching Factors

Country Ceiling captures risk of Sovereign Imposed Exchange Controls that Impede Private Sector’s ability to convert Local Currency into Foreign Currency and Transfer to Private Sector s ability to convert Local Currency into Foreign Currency and Transfer to Non-resident Creditors

• Rule of Law/Governance/Institutional Factors
• Reduces risk of arbitrary policy decisions
• Openness to International Trade/Capital
• Membership of Intl Orgs –
• Discourages Controls on Trade/Investment
• Macroeconomic Instability/Vulnerability =

Chronic Inflation/Fixed Exchange Rates

• Macroeconomic Instability/Vulnerability = Chronic Inflation/Fixed Exchange Rates
• Country Ceiling Model Scores

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Country Ceilings: Sovereign Ratings vs Country Country Ceilings: Sovereign Ratings vs. Country Ceilings

Country Foreign Currency IDR Country Ceiling Comments Ghana B+ B+ Speculative grade sovereign Ghana B+ B+ Speculative grade sovereign Lesotho BB- A- Member of Common Monetary Area Indonesia BBB- BBB No history of exchange controls Greece B- B (was AAA) Euro area common country ceiling of ‘AAA’ withdrawn China A+ A+ Maintenance of capital controls p New Zealand AA AAA High grade sovereign

Source: Fitch 12/09/2013

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Sovereign Rating Process Sovereign Rating Process

• Rating visit to country
• 2-3 analysts
• 2-3 analysts
• Meetings with government, central bank & other institutions
• Quantitative and qualitative country-specific analysis
• Peer analysis (comparative)
• Sovereign Rating Model
• An important input, but not a determinant of the rating
• Sovereign rating committee (at least annually)
• Issue Rating Action Commentary and publish report on website
• Investor calls to subscribers
• On-going surveillance
• Subject to Fitch’s corporate regulatory and compliance requirements

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Agenda Agenda

Concepts and Definitions Concepts and Definitions Key Rating Factors Global Economic & Sovereign Credit Trends

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Macroeconomic Policy and Prospects

Track record of macroeconomic stability without excessive imbalances and underpinned by credible policy framework For New Zealand - Strengths:

• Strong monetary framework, with lower and less volatile inflation than peers
• Economic flexibility compared to other high-grade sovereigns

y p g g g

• Highly educated workforce, flexible labour market

Weaknesses:

• The five-year real GDP growth at 0.7% below ‘AA’ peer median (1.0%)
• 10-year REER volatility (7.5%) higher than ‘AA’ median, reflecting influences

10 year REER volatility (7.5%) higher than AA median, reflecting influences from the global commodity cycle

• Productivity remains below the OECD average

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Macroeconomic Factors

GDP Growth GDP Growth

5 (pp) Level* Volatility**

Inflation

10 (pp) Level* Volatility** 3 4 5 6 8 10 1 2 2 4 A A A A A w Z e a l a n d A B B B B B B / C / D A A A N e w Z e a l a n d A A A B B B B B B / C / D N e w

* 5-year average (2008-2012) ** 2012 data Source: Fitch “Sovereign Comparator”, July 2013

N e

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External Finances

Access to foreign exchange to service foreign currency obligations Access to foreign exchange to service foreign currency obligations

• External finances is a key vulnerability for NZ’s credit profile
• Persistent current account deficit drives up external debt liabilities
• Persistent current account deficit drives up external debt liabilities
• Fitch expects deterioration in trade balance owing to investment needs for

Canterbury reconstruction

• External indebtedness remains high relative to ‘AA’ peers
• Net external debt (NXD) at 77.1% of GDP in 2012, higher than ‘AA’ median (-82.5%)
• The bulk of external debt liabilities lie with the private sector

The bulk of external debt liabilities lie with the private sector

• The shift of net household savings rate to positive territory and public sector fiscal

consolidation may reduce NXD over medium term

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External Finances

Net External Debt Current Account Balance

New Zealand Australia OECD median AA median

Net External Debt

New Zealand Australia OECD median AA median

Current Account Balance

300 400 (%CXR) 15 (%GDP) OECD median AA median 100 200 300 5 10

• 200
• 100
• 10
• 5

Source: Fitch

2007 2009 2011 2013f 2015f 2007 2009 2011 2013f 2015f

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Public Finances

Direct impact on sovereign creditworthiness; indirect effect on economy th h h l f t ti di d b i through channels of taxation, spending and borrowing

• Counter-cyclical stimulus resulted in GG debt rising sharply from 24% of GDP

at end 2008 to 48 9% at end 2012 higher than AA median (32 1%) at end-2008 to 48.9% at end-2012, higher than AA median (32.1%)

• GG debt will peak in 2013, and start to decline in 2014
• Return to fiscal surplus in FY16 through spending curbs
• Return to fiscal surplus in FY16 through spending curbs
• Rebuilding of Christchurch and impact of fiscal austerity may delay the return to fiscal surplus

from end-2015 (official target) P liti l ti f fi l lid ti

• Political consensus supportive of fiscal consolidation
• Deep tax base: GG revenue at 43.4% of GDP

St d d t b d t d h l NZ t b ild h b ff

• Strong demand at bond tenders help NZ to build up cash buffers
• Low exchange rate risk: FC-denominated debt at less than 3% of total debt

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Public Finances: Assessing Sustainability

5 10 15 20 25

Public Finances: Assessing Sustainability

Average Interest Rate-Growth Differential

Sustainability Gap: Primary Deficits

5 10 15 20 25 Japan Constant 1990-99 2000-10 2011-16 Advanced 1.5 0.2

• 0.4

Ireland US Constant debt Get debt to economies G7 3.2 1.6

• 0.1

G20 Advanced 3 3 1 3 0 3 Spain UK Get debt to 60% Largest 4yr G20 Advanced 3.3 1.3

• 0.3

Emerging economies

• 1.0
• 3.3
• 2.1

Greece* Italy g y change in p.d. before 2007 G20 Emerging 0.3

• 3.0
• 2.8

Low-income i

• 6.9
• 7.3
• 4.7

Note: * Greece target debt ratio in 10 years is 120%; for the rest d2022 = 60% Assumed common IRGD = (i – y) = 2% and nominal GDP growth (y) = 5% Source: Fitch and JPM, Government debt sustainability in the age of fiscal Activism, June 11, 2010

economies

Source: IMF Fiscal Monitor April 2011

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Public Finances

Debt Dynamics Cyclically-adjusted Overall Balance

Baseline Growth Shock 2012 Deficit Persists

Debt Dynamics Cyclically-adjusted Overall Balance

Australia Canada Eurozone NZ UK G 20 Adv (% GDP) 60 65 70

(% GDP )

0.0 2.5 5.0 UK G-20 Adv. 45 50 55 60

• 7.5
• 5.0
• 2.5

30 35 40 2012 2015 2018 2021

• 10.0

5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Growth Shock: assumes a negative shock equivalent to half of 10y Std Dev'n Real GDP Growth Source: Fitch estimate. The specific projections graphed here are based on informal estimates made for purposes of illustration and have not been used as part of a credit or ratings analysis.

2012 2015 2018 2021

Source: IMF Fiscal Monitor April 2013 12/09/2013

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Structural Features Structural Features

Flexibility & diversification; and resilience to shocks Governance Indicators

• NZ scores highly in World Bank’s governance

indicators; friendly business environment

• NZ’s banking system scores ‘a/1’ on Fitch’s

Political 'AA' Median New Zealand

• NZ s banking system scores a/1 on Fitch s

framework, reflecting a high quality on a standalone basis

Political S tability Gov't Eff- ectivness Regulatory Quality

• NZ’s national savings/investment imbalance

is a weakness

• Prolonged low net household saving resulted

Rule of Law Voice & Account-ability

in substantial private sector external liabilities

• Too early to tell whether a shift in saving

behaviour has occurred

Control of Corruption y

• Per capita income lower than ‘AA’ median

Source: World Bank and Fitch 12/09/2013

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Structural Factors

Savings/Investment Balance GDP Per Capita (2012*)

(USD'000s) 60 000

Savings/Investment Balance

Australia Canada Spain USA NZ (% GDP) 30 000 40,000 50,000 60,000 0 0 2.5 5.0 7.5 NZ 10,000 20,000 30,000

• 7 5
• 5.0
• 2.5

0.0 A A A A A w Z e a l a n d A B B B B B B / C / D

• 10.0
• 7.5

1997 1999 2001 2003 2005 2007 2009 2011 2013

* Market exchange rates Source: Fitch “Sovereign Comparator”, July 2013

N e w

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Bank Systemic Risk Matrix (selected countries) y ( )

Macro-Prudential Risk Indicator*

1 2 3

Bank Systemic Risk Indicator**

aa

Australia Canada Singapore

a

New Zealand Saudi Arabia US UK France Hong Kong US

bbb

Korea Kuwait Belgium Turkey

bb

Philippines Spain China

bb

Philippines Spain Russia China Indonesia

b

Latvia Lithuania

ccc cc c

Cyprus

c

Cyprus

f

Greece

* Rapid credit growth and either asset-price inflation or real exchange rate appreciation; 1 is least risky, 3 riskiest ** BSI measures banking system’s standalone financial quality or strength and is simple weighted average of bank viability ratings for a critical mass of a country’s banks Source: Fitch Macro Prudential Risk Report January 2013 12/09/2013

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Source: Fitch Macro-Prudential Risk Report, January 2013

New Zealand: FC ‘AA’/Stable; LC ‘AA+’/Stable New Zealand: FC AA /Stable; LC AA+ /Stable

Summary: Strengths and Weaknesses

• New Zealand’s ratings balance its high external

Summary: Strengths and Weaknesses

g g indebtedness and low average incomes compared with ‘AA’ medians against strong policy management and credit fundamentals including governance and a high level of economic development

Rating factorsa Status Trend Public finances Neutral Stable

• Net external indebtedness, at nearly 80% of GDP, acts

as a significant constraint on New Zealand’s ratings

• Popular support and political consensus to reduce public

debt remains high. The fiscal year 2013 budget deficit

Macroeconomics Neutral Stable Structural issues Neutral Stable External finances Weakness Stable

came in at 2.9% of GDP, which was below the expectation of 3.4% set out in the half-year update

• Although a severe drought hurt the economy in early

2013, earthquake reconstruction is expected to boost gro th b t ill iden the c rrent acco nt deficit

External finances Weakness Stable

growth but will widen the current account deficit

• The unemployment rate fell to 6.2% in Q113, down from

6.8% in Q412, which highlights the economy’s resilience

• f late

a Relative to ‘AA’ category

Source: Fitch

• Key rating drivers
• Sustained improvement in external finances
• Reduction in government debt ratios

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Agenda Agenda

Concepts and Definitions Concepts and Definitions Key Rating Methodology Global Economic and Sovereign Credit Trends

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Weak Growth and High Debt Weigh on DM Ratings Weak Growth and High Debt Weigh on DM Ratings

Rating Drivers Rating Levels Rating Drivers

• Crisis taken heavy toll on DM ratings
• High debt, weak banks and low growth

t i bi ti Rating Levels

FC IDRs, Un-weighted averagesa Asia LatAm E.Eur MENA SSA DM

a toxic combination

• Ratings are through-the-cycle, but this

is no ordinary cycle

14 16 18 MENA SSA DM AA A+ AAA

• DM Outlooks: 10 on Negative; none on

Positive

• EM Outlooks: 12 on Negative; 8 on

6 8 10 12 A- BBB BB+ BB-

g ; Positive

2 4 Jan 97 Jun 02 Nov 07 Apr 13 B CCC p

a Not Chain linked. New ratings tend to drag down EM averages

Source: Fitch

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Run Up in Advanced Economies’ Public Debt Is Run-Up in Advanced Economies Public Debt Is Unprecedented In Peacetime

300 US UK Germany Japan

Gross Public Debt (% of GDP)

200 250 Japan-Russia War Japanese Bubble Bursts 100 150 50 100 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Source: IMF Public Finance Historical Dataset

Napoleonic Wars American Civil War First World War Second World War

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Ageing: The Next Fiscal Crisis Ageing: The Next Fiscal Crisis

Rating Drivers Sovereign Rating Model (SRM) Rating Drivers

• Typical DM budget worsens by 0.6% of

GDP by 2020, and 4.9% by 2050 if no policy change Debt rises rapidly Sovereign Rating Model (SRM)

Predicted Notch Downgrades from Ageing

France Germany Greece Italy Japan Spain UK USA Australia

policy change. Debt rises rapidly.

• No immediate rating actions: time for

reform to neutralise costs (eg Italy). P ibl d d t d d

0.5

UK USA Australia

(Rating notches)

• Possible downgrades over next decade

for countries facing most severe/urgent ageing pressures, absent reforms. SRM di t 1 5 t h d d

• 0.5

0.0

• SRM predicts a 1.5-notch downgrade

by 2030 for countries with worst ageing. Japan Ireland & C pr s face most

1 5

• 1.0
• Japan, Ireland & Cyprus face most

urgent challenge; Lux, Belgium, Malta and Slovenia face most severe impact.

Source: Fitch

• 1.5

2012 2015 2020 2025 2030

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Emerging Markets Have Seen Strong Upgrade Emerging Markets Have Seen Strong Upgrade Trend

EMBIG Market Cap by Ratings Investment Grade Graduates

Country Date Current rating Philippines Mar 13 BBB-

EMBIG Market Cap. by Ratings

• Inv. grade

BB B CCC/D

Investment Grade Graduates

Uruguay Mar 13 BBB- Turkey Nov 12 BBB- Indonesia Dec 11 BBB 80% 100% Indonesia Dec 11 BBB- Colombia Jun 11 BBB- Azerbaijan May 10 BBB- 40% 60% Panama Mar 10 BBB Brazil May 08 BBB Peru Apr 08 BBB 0% 20% Dec 95 Sep 01 Jun 07 Mar 13 Peru Apr 08 BBB p

Source: Fitch, JP Morgan Note: Foreign-Currency Issuer Default ratings. Since 2008. In addition, Iceland (Feb 12), Romania (Jul 11) and Latvia (Mar 11) have regained IG lost during crisis; Source: Fitch

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Emerging Economies Demonstrate Greater Resilence

Contribution to Longer Economic EM Recessions Become Less Severe

Emerging Economies Demonstrate Greater Resilence

Contribution to Longer Economic Expansions Between 1980s and 2000-07 EM Recessions Become Less Severe

(%) 1950–69 1970–89 1990–99 2000–11 (% GDP) 20 30 40

• 4
• 2

(% GDP) 10 20 12

• 10
• 8
• 6
• 10

xternal hocks mestic

• cks
• licies

ucture Total

• 14
• 12

DM EM

Note: Chart on the left reports the median peak-to-trough amplitude. The chart on the right shows the contribution to the change in the expected mean duration of expansions from 1980s to 2000-07 Source: IMF

Ex sh Dom sh Po Stru

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11/23/12

Fed Exit / Normalisation?

Sovereign Yields: US Treasuries; Eurozone Spreads (Spain vs Germany)

Fed Exit / Normalisation?

(Index) (%) ( % ) US 10-yr Yield (LHS) Spain-Germany Spread (10-yr) (RHS)

VIX “Fear Index”

60 70 80 (Index) 4 5 6 4 5 6 7 ( % ) 20 30 40 50 1 2 3 1 2 3 4 10 20 c-06 c-07 c-08 c-09 c-10 c-11 c-12 /29/2006 /17/2007 4/8/2008 /24/2008 /15/2009 3/4/2010 /20/2010 6/9/2011 /26/2012 /12/2012 5/3/2013 Dec Dec Dec Dec Dec Dec Dec 12/ 8/ 4 11/ 7/ 3 10/ 6 1/ 9/ 5

Source: CEIC, Fitch Source: Bloomberg, Chicago Board of Trade

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1/15/12

Will Emerging Markets Look As Good In A More Normal Will Emerging Markets Look As Good In A More Normal World?

(Index) (Index)

iTraxx Asia Ex-Japan Investment Grade CDS Index Asian Equities

200 225 250 (Index) 875 900 925 950 ( ) 150 175 200 750 775 800 825 850 100 125 ul-11 ct-11 n-12 r-12 ul-12 ct-12 n-13 r-13 ul-13 700 725 750 u l

• 1

2 g

• 1

2 p

• 1

2 c t

• 1

2

• v
• 1

2 c

• 1

2 n

• 1

3 b

• 1

3 a r

• 1

3 p r

• 1

3 a y

• 1

3 n

• 1

3 u l

• 1

3 Ju Oc Jan Ap Ju Oc Jan Ap Ju J u l A u g S e p O c t N

• v

D e c J a n F e b M a r A p r M a y J u n J u l

MSCI APEX-50 Asia-Pacific Regional Index Source: Bloomberg Source: Bloomberg

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1/15/12

China’s Role

China’s “Middle Class” Exports to China as Share of Total

China s Role

China’s “Middle Class” Exports to China as Share of Total

2000 2011 (% exports)

(People, Millions)

>RMB30k >RMB100k 20 25 30 (% exports) 250 300 350

Millions)

5 10 15 20 100 150 200 250 5 stralia Korea Chile Japan Africa NZ ailand US ussia India many UK 50 100 005 006 007 008 009 010 011

Source: IMF Direction of Trade Statistics

Aus K J S A Tha R Germ

Source: Fitch

20 20 20 20 20 20 20

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11/23/12

Regional Sovereign Credit Trends Regional Sovereign Credit Trends

Outlooks by Region Sovereign Rating Actions by Regiona

DM Stable Negative Positive

Outlooks by Region

20 (Index) 2010 2011 2012 2013 YTD

Sovereign Rating Actions by Regiona

LatAm & Carib DM 10 EM Europe EM Asia

• 20
• 10

0% 25% 50% 75% 100% ME&A

• 30

20 DM zone Other Asia atAm MEA EM urope

a Outlook change = +/-1; upgrade/downgrade = +2/-2

Source: Fitch

D E' DM O EM EM La EM E Eu

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Emerging Asia: Sovereign Ratings Overview Emerging Asia: Sovereign Ratings Overview

Foreign Currency (FC) Local Currency (LC) Sovereign Long-Term IDR Outlook Long-Term IDR Outlook China A+ Stable A+ Stable India BBB- Stable BBB- Stable Indonesia BBB- Stable BBB- Stable Malaysia A- Negative A Negative Mongolia B+ Stable B+ Stable Philippines BBB Stable BBB Stable Philippines BBB- Stable BBB Stable Sri Lanka BB- Stable BB- Stable Thailand BBB+ Stable A- Stable

Source: Fitch

Vietnam B+ Stable B+ Stable

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High Income Asia: Sovereign Ratings Overview High-Income Asia: Sovereign Ratings Overview

Foreign Currency (FC) Local Currency (LC) Sovereign Long-Term IDR Outlook Long-Term IDR Outlook Australia AAA Stable AAA Stable Hong Kong AA+ Stable AA+ Stable Japan A+ Negative A+ Negative Korea AA- Stable AA Stable Macao AA- Stable AA- Stable New Zealand AA Stable AA+ Stable New Zealand AA Stable AA+ Stable Singapore AAA Stable AAA Stable Taiwan A+ Stable AA- Stable

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Further Background Further Background

“Sovereign Rating Model” September 2012

• “Sovereign Rating Model”, September 2012
• “Sovereign Rating Methodology”, August 2012
• “Country Ceilings”, August 2012
• “Sovereign Data Comparator”, July 2013

g p , y

• “Fitch Sovereign 2012 Default and Transition Study”, March 2013

“M P d ti l Ri k M it ” J 2013

• “Macro-Prudential Risk Monitor”, Jan 2013

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Methodology for rating local Methodology for rating local governments in New Zealand

Matt Wright International Public Finance

International Public Finance and Methodology Key International Public Finance and Methodology-Key Focus

• Institutional Framework
• Political Context
• Socio-Economic Profile

Socio Economic Profile

• Budgetary Performance
• Debt Contingent Liabilities and Liquidity

Debt, Contingent Liabilities and Liquidity

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Institutional Framework

Centralised/ Transfers Stability Funding Political Priorities Decen. Fiscal Imbalance

• Pol. &

Insti Equalisation Responsibilities

• Pol. & Insti

Framework Funding Control Prudential Rules Audits/ Control Control Authorisation Reporting

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Assessment of Institutional Framework Assessment of Institutional Framework

St Neutral

Evolving

Strong

Some form of vertical and horizontal equalisation f di

Neutral

Generally stable regulatory regime.

Evolving

Volatile intergovernmental relationship resulting in a lack

• f confidence in monitoring or

l funding. Robust prudential regulatory regime or capital market discipline. Some form of equalisation mechanisms in place, but potentially not very far reaching. Adequate transparency, control. Lack of accounts transparency with mainly cash accounting systems Stable inter-government relationship. Very good transparency q p y, although there may not be full presentation of accounts, such as balance sheet and cash flows. g y without any or limited information on accruals, payables or contingent liabilities. including forecasts. Good protection for creditors. General adherence to Occasional changes in the funding system changes. Some form of debt restrictions but not necessarily very rigid Little revenue flexibility. Lack of reporting on the wider public sector risk or h h ldi international accounting standards but not necessarily very rigid. Adequate control. shareholdings. Rudimentary debt- management practices and experience.

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Political Context & Socio Economic Profile Political Context & Socio-Economic Profile

El t d & l t d

• Elected & non-elected
• fficials
• Management ability
• Corporate governance

Corporate governance

• Population and projections
• Industry sectors
• Regions contribution to NZ

g GDP

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Budgetary Performance and Outlook Budgetary Performance and Outlook

O ti i k

• Operating margin a key

ratio

• Revenue driven by rates
• Expenses driven by staff

Expenses driven by staff costs Capital expenditure driving

• Capital expenditure driving

debt growth

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Debt Liquidity and Contingent Liabilities Debt, Liquidity and Contingent Liabilities

M t it fil f d bt

• Maturity profile of debt
• Cash holdings
• Council owned

corporations corporations

• Guaranteed debt
• Cash drain or dividend

provider.

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Disclaimer Disclaimer

Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. y, , y y

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

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