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New Zealand is living beyond its means and householders need to start saving, says credit rating agency Fitch.
Fitch on Thursday revised the outlook for New Zealand's credit rating to negative, making a downgrade more likely.
Fitch affirmed the rating at AA plus but changed the outlook to negative from stable, saying a continuing deterioration in New Zealand's net external debt and liability position would likely lead to a downgrade.
Fitch head of Asia Pacific sovereign ratings James McCormack told Radio New Zealand on Friday that he thought New Zealand's current account deficit was a structural feature of the economy.
"It does tell us the economy as a whole is living beyond its means and borrowing money to finance that," he said.
"When the economy is living beyond its means you can divide it into the public and private sector and the private sector is not saving enough money in New Zealand, so we think if that is going to be the case going forward then it comes down to the public sector to save more money."
That would mean spending cuts.
Fitch was not critical of the government providing tax cuts, saying countries all over the world were trying to provide short term stimulus during a global recession.
It acknowledged it was a difficult time for exporters.
"It's difficult for the export sector, there's no question about that, there's the pricing effect and there's the New Zealand dollar and the third factor is global demand."
Households urged to do their bit
However, it said householders needed to change their behaviour.
"Household savings are particularly low in New Zealand, even lower than they have been in the US ... they probably need to come up to a higher level."
McCormack said if householders did improve saving there could be an "unpleasant adjustment" as their reduced spending impacted on the economy.
The previous government started the Kiwisaver scheme and New Zealand Superannuation Fund to improve savings but it was "probably not enough".
Another concern Fitch raised was that the housing sector may bounce back and see even more borrowing.
Implications of rating downgrade
McCormack said the agency would continue monitoring what happened in New Zealand.
Credit rating downgrades affect New Zealand's ability to borrow money and interest rates charged.
"I think in order for the outlook to go up to stable we'd need to see an adjustment in the current account balance," McCormack said.
"We started to see that in the first quarter. If the current account deficit continues to decline and decline in a meaningful way such that the external debt of New Zealand stabilises then I think the rating outlook could go back to stable."
Both the previous Labour government and the National Government have continually urged New Zealanders to save more.
Finance Minister Bill English, in Brisbane for a meeting with Australian Treasurer Wayne Swan, on Thursday said Fitch had identified the same problems the government had.
"That is we still have a high current account deficit and we're 10 years away from having a budget surplus," he said.
"It's telling us there's a bit more work to do."
The Fitch report on Thursday impacted on the New Zealand dollar, sending it down from US64.63 cents to US63.90 cents on Thursday but on Friday morning it had recovered to US64.86 cents.
Fitch said the affirmation of the AA plus rating was due to the country's strong fundamentals, including a commitment to low inflation, strong public finances and track record of policy and structural adjustment.
The strength of the banking sector had helped New Zealand navigate turmoil in global financial markets without a crisis.
But severe macroeconomic imbalances, most notably the current account deficit and low household savings, remained in place and adjustment was further complicated by the volatility of the New Zealand dollar.
A reliance on short-term foreign funding by local banks remained a potential source of risk.
