Concerns about another housing market bubble and its effect on New Zealand's debt levels have sparked another ratings agency to downgrade its outlook on the country.

Fitch Ratings yesterday maintained its AA+ rating on New Zealand but downgraded its outlook from stable to negative, sending the New Zealand dollar to its lowest point in two weeks.

The dollar closed at US63.9c yesterday, down from US64.63c in a move that currency traders called a knee-jerk reaction.

New Zealand was put on negative credit watch by Standard & Poor's earlier this year over concerns about the current account deficit but it was lifted back to stable after the May Budget.

Yesterday Fitch said it was concerned by the size of the nation's current account deficit.

"A stronger fiscal adjustment than currently planned may be required to raise national savings and reduce the current account deficit, as well as structural reforms to improve productivity."

It also warned New Zealand could fall into a low-growth trap as foreigners demand higher returns to incentivise them to continue to lend to New Zealand so it can consume more than it produces, gradually eroding New Zealand's fundamental credit strengths, including strong public finances, and rendering it more vulnerable to future adverse shocks.

Goldman Sachs JBWere strategist Bernard Doyle said the negative outlook was unexpected, yet unsurprising.

"The New Zealand economy is treading a fine path between a relatively healthy fiscal position (vs peers, if not in absolute terms) and external debt deterioration that is yet to stabilise. It is the latter that Fitch has [emphasised]."

BNZ senior economist Craig Ebert said it was a reminder of some of the broad imbalances that could remain in the economy.

"Even if we do get some growth emerging in the next year or two, the composition might be all round the wrong way, and this is where the currency is quite a big issue. If you believe that global news is going to get better, the currency is going to keep edging up. It might be in over-valued territory.

"There is a chance the world gets carried away with itself, the currency rises on the back of it and we essentially shut our export sector out of any recovery and we have to rely therefore on domestic demand, consumers and housing to fill the gap. That's all the wrong way round."

ASB economist Chris Tennent-Brown said the Fitch rating would likely remain negative as long as people continued to spend money on housing.

"We need to see business investment and more saving. Otherwise we will be stuck as a highly indebted society with a low growth rate."

Japanese bond and currency dealer Tsutomu Soma warned the downward revision may spark investor worries over whether the nation can emerge from recession.

"That could cause selling of commodity currencies, particularly the kiwi."

HOW WE RATE

Long-term sovereign credit ratings

* Standard & Poor's - AA+ stable
* Moody's - AAA stable
* Fitch - AA+ negative