New Zealand's "monetary policy flexibility, wealthy economy, and solid institutions" are enabling "decisive policy actions" and putting the country in a strong position for economic recovery, ratings agency S&P Global says in a new report.

S&P Global has affirmed New Zealand's "AA/A-1+" foreign currency and "AA+/A-1+" local currency sovereign credit ratings and retained a positive outlook for the immediate future.

"The positive outlook reflects our view that New Zealand's strong fundamentals would allow its fiscal profile to strengthen after the Covid-19 outbreak subsides, leading to a rating upgrade in the next one to two years," S&P Global said.

That bodes well for the Reserve Bank and Government as they look they head off the worst impacts of the Covid-19 pandemic with higher levels of international borrowing.

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Ratings agencies like S&P Global are highly influential in setting the cost of borrowing for governments.

It wasn't all good news, with the agency noting that New Zealand was now almost certainly in recession.

"The Covid-19 outbreak and subsequent government lockdown has delivered a severe economic and fiscal shock to New Zealand," S&P said.

"We believe the economy is in recession, and the government's fiscal position is weakening substantially more than it was forecast to do following the December 2019 midyear budget.

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"However, we expect the budget performance to improve after the large deficit in fiscal 2021 as the pandemic subsides."

Net general government debt is likely to remain at elevated levels for a number of years.

S&P Global noted some of New Zealand's economic weaknesses - specifically high levels of private debt tied to the residential housing market and agricultural sector.

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But it said that on balance the current economic strengths provided the country with "flexibility to offset potential risks related to its large external imbalances, high household and agriculture sector debt, dependence on commodity income, and financial system stability".

"We consider the economy and financial system is less susceptible to external financing risks than in the past."

The report includes a "downside" scenario which could see the New Zealand's outlook downgraded from positive to stable.

"We could revise our outlook to stable if the fiscal deficits are substantially weaker than our forecasts, driving higher debt levels and interest costs," S&P said.

"This would reduce the government's headroom to address potential macroeconomic and financial sector risks, should they materialise."

It expects New Zealand's economy to substantially weaken this year before recovering in 2021.

"The government's fiscal stimulus and related measures are aimed at supporting the economy during this period," it says.

"These measures should somewhat soften the blow presented by Covid-19 and support the subsequent economic recovery."

New Zealand's free-floating exchange rate - the dollar has depreciated sharply since mid-2014 and is down about 10 per cent this year relative to the US dollar - would support economic recovery, S&P said.

"To date New Zealand's financial system is successfully navigating another financial and economic crisis," it said.

"With this in mind, we believe the financial system will retain ready access to external capital markets and is less susceptible to shifts in foreign demand than in the past."

S&P Global warns that a house price correction is likely.

"Property prices grew by more than 9 per cent during the first three quarters of fiscal 2020, increasing risks of a sharp correction," it said.

"We believe property prices are likely to fall by about 10 per cent in the coming 12 months because the economy is in recession and as unemployment rises and migration slows due to travel restrictions."

The ratings agency also provided a ringing endorsement of the Reserve Bank of New Zealand (RBNZ) and its policy response.

"The RBNZ's inflation mandate and supervisory role have strong credibility, and the central bank is operationally independent from the government," it said.