The pace of New Zealand's economic recovery is likely to remain modest, the International Monetary Fund says.
Economic growth should pick up from 1.1 per cent last year to around 2.3 per cent this year and 3.2 per cent next year, according to the IMF's annual report on New Zealand.
But that will be driven by earthquake-related reconstruction, and the timing and size of that spending remain uncertain, it says.
The risks to the outlook relate mostly to emerging weakness in the global economy and a possible upheaval in the global financial system.
"Banks' persistent reliance on offshore wholesale funding leaves them vulnerable to the tail risk of a temporary shutdown of global funding markets."
While they are less vulnerable than in 2008 because they derive more of their funding from deposits and the maturity of their wholesale funding has lengthened, almost 30 per cent of the offshore funding still needs to be rolled over within three months, the IMF says.
New Zealand banks' ratio of loans to deposits of 150 per cent is higher that Australia's 125 per cent and much higher than in Hong Kong, Singapore, Taiwan and Japan where it ranges from 50 to 75 per cent.
Banks remain sound, the report says, but are exposed to highly leveraged households and farmers.
It notes that house prices remain at historically high levels relative to incomes and rents, while farm debt is also historically high relative to agricultural export earnings.
The IMF acknowledged regulatory requirements on New Zealand banks were more conservative than in many countries, but it recommends they be tightened further, so that the big four banks' large wholesale funding needs and exposure to highly leveraged borrowers do not pose too great a potential risk to taxpayers.
It says the Reserve Bank's monetary policy should remain accommodative until signs emerge of a robust recovery, and that it should be the first line of defence if the economy is sideswiped by another adverse shock.
The country's large net foreign debt poses a risk, it says, and estimates the exchange rate to be 10 to 20 per cent higher than it should be if those liabilities were to be stabilised at around 80 per cent of GDP.
"However, part of its current strength may dissipate over time with the eventual tightening of policy rates by major central banks."
Increasing national saving, including through the Government's planned fiscal deficit reduction, would reduce external vulnerability.
Finance Minister Bill English said the IMF had endorsed the Government's approach to getting back to surplus and the rationale behind it.
"It notes our deficit reduction path strikes a balance between the need to contain both public and private debt increases, while limiting adverse impact on economic growth during the recovery," English said.
"It also notes that getting back to fiscal surplus in 2014/15 should put New Zealand in a better position to deal with future shocks and take pressure off monetary policy and the exchange rate."
But Greens co-leader Russel Norman said: "A track back to surplus after National's record borrowing binge is important but the arbitrary target of achieving a tiny surplus in 2014/15 should not come at the expense of wider economic policy.
"It matters more that we address fundamental imbalances holding New Zealand back, making us more indebted to the rest of the world."By Brian Fallow Email Brian