New York based ratings agency Moody's Investors Service says New Zealand's economy and government finances are on an improving trend but warns the country's creditworthiness faces "various challenges".

"Economic growth is accelerating, partly due to earthquake reconstruction, with real GDP expected to increase by 3 per cent in 2014, while the government budget is forecast to be in a balanced position in the 2014-15 fiscal year and in surplus thereafter" Moody's said in a statement.

Moody's currently rates the government's credit worthiness at a very solid Aaa with a stable outlook.

It said New Zealand's current scenario meant the ratio of government debt to GDP would peak below the median for Aaa-rated governments and stabilise thereafter.


"Moody's further notes that the government aims for a significantly lower debt level by the end of the decade."

The key risk to New Zealand's credit worthiness was the long standing reliance on foreign savings to finance relatively large current account deficits - a problem which had been evident for the past four decades.

"As a result, New Zealand's major vulnerability - despite the absence of any problems in accessing the global capital markets - is its dependence on foreign capital inflows, and its negative net international investment position is the largest of any Aaa-rated country."

However, Moody's noted that a large portion of those liabilities belonged to the subsidiaries of Australian banks and "given the strength of the parents, these are unlikely to represent a significant risk to the sovereign".

Moody's noted the government 's deficits of 5 per cent of GDP in 2010 and 2011 as a consequence of the economic effects of the global financial crisis and the Canterbury earthquakes but said they came after several years of fiscal surpluses which reflected "the prudent fiscal stance of New Zealand governments".

"This commitment to countercyclical policy is likely to allow the government to achieve its target of balancing the budget over the next few years."

Moody's assessed New Zealand's banking sector risk as low.

It said the Government's Aaa government bond rating could move downward "if economic growth is lower than now forecast in the coming few years and, as a result, government debt ratios do not improve as expected".


Finance Minister Bill English said the report "confirms the Government's responsible economic and fiscal programme is on the right track".

"It's encouraging that this has again been recognised by Moody's."

On the challenges identified by Moody's, English said the longstanding current account deficit had improved in recent years, "as has New Zealand's net international liabilities position".

"But we need to continue with policies to further improve these indicators by building a more competitive export sector so New Zealand can earn its way in the world."