Standard & Poor's Ratings Services affirmed its 'B+/B' issuer credit ratings on the Cook Islands. The outlook is stable. The Transfer & Convertibility assessment remains 'AAA'.

"The ratings affirmation Islands reflects the Cook Islands' moderate average income level and modest government debt burden," Standard & Poor's credit analyst Craig Michaels said. "However, vulnerabilities associated with the country's weak policymaking culture and institutional settings constrain the ratings. Despite recent improvements, we believe the government can further strengthen institutional checks and balances in order to safeguard its past gains in fiscal consolidation."

In addition, the Cook Islands economy is vulnerable to the impact of cyclones and changing tourism preferences on its major revenue earner, the tourism industry. Further moderating the ratings are the country's lack of monetary policy flexibility and data deficiencies that constrain our analysis of the Cook Islands' external position.

We project Cook Islands' real per capita GDP growth to average 3.6% over 2014 to 2016, partly reflecting further expected declines in its population. Emigration is high in the Cook Islands, averaging 1.5% of the population annually during the past 17 years. Although the Cook Islands' integration with the Australian and especially New Zealand labor markets gives the Cook Islands a valuable alternative for its citizens, it does constrain prospects for the economy to diversify into higher value-added areas. However, we expect moderate further increases in tourist arrivals to support economic growth, with tourism remaining the primary economic activity in the Cook Islands. Income is high compared to that of peers, with GDP per capita estimated at US$21,000 in the year ended June 30, 2012.

In our base-case scenario, we project general government debt will rise by an average 3.3% of GDP annually over 2014 to 2016, with net debt expected to average 22% of GDP over the same period. General government interest expenditure to revenues is estimated to be a low 1.0% on average between fiscal years 2014 and 2016, reflecting the concessional and long-term nature of current borrowings. The Cook Islands' increasing debt is mainly because of water and sanitation investment, although ongoing shortfalls in infrastructure and basic services will continue to limit fiscal flexibility. And while government debt remains low, a large portion of this debt is exposed to foreign currency movements.

We equalize the local currency rating with the foreign currency rating, reflecting the Cook Islands' absence of both monetary policy flexibility and a domestic capital market, and its use of the New Zealand dollar. The transfer and convertibility assessment for the Cook Islands is 'AAA', which also reflects its use of the New Zealand dollar.

Mr. Michaels added: "The stable outlook balances the Cook Islands' sound economic growth prospects and low level of government debt, against the challenges it faces in overcoming weak political and institutional settings and infrastructure shortcomings."

We would lower the ratings if a weakening in global economic conditions reduces tourism sector receipts and, in turn, worsens the government's finances. A weakened commitment to uphold past fiscal gains through high operating spending, resulting in its debt burden rising by significantly more than we currently expect, could also bring pressure on the ratings.

Improvements in the sovereign creditworthiness could come with sustained gains in policymaking stability and effectiveness, evidenced by the reduction of sizable data deficiencies, and progress in increasing economic opportunities for residents.

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Cook Islands ratings affirmed at 'B+/B'