New Zealand's growing debt has led international ratings agency Standard & Poor's to downgrade the outlook for the country's external credit rating to negative from stable.
The agency also said the future of the foreign currency rating hinged on what the Government offered in its next budget, in May.
S&P's affirmed its AA+ foreign currency and AAA local currency long-term ratings on New Zealand, and revised the outlook on the foreign currency rating from stable.
The rating agency maintained its stable outlook on the local currency rating, and affirmed its A-1+ short-term ratings on New Zealand and ratings on the country's debt issues.
"The negative outlook on the foreign currency rating reflects the likelihood of a rating downgrade if external imbalances begin to pressure the country's investment, growth, and fiscal performance," S&P's sovereign analyst Kyran Curry said.
New Zealand's economic policy flexibility was becoming more limited as external imbalances grew, with the current account deficit now a "sizeable" 8% of gross domestic product (GDP).
The Government was forecasting fiscal deficits on a cash basis of 3.7% of GDP in 2009, 4.4% of GDP in 2010, and 5.6% of GDP in 2011.
Such deficits were not uncommon, given the lower tax take and government measures to offset the slowing economy, Mr Curry said.
However, the Government needed a plan to consolidate the country's finances in the medium term to boost market confidence.
"New Zealand's next budget will, in our view, be a key indicator of the Government's intent regarding medium-term expenditure cuts and reprioritising of policy initiatives.
"A credible medium-term fiscal plan combined with an easing of New Zealand's external imbalances could result in the ratings stabilising at the existing levels.
Absent such developments, the foreign currency rating could be lowered."
Prime Minister John Key will meet his economic ministers and departmental heads tomorrow to discuss issues facing the country as a result of the global turmoil.
Finance Minister Bill English said the downgrade vindicated the urgency with which the Government was implementing its economic plan.
New Zealand's credit rating remained high but the position was not as comfortable as the Government would like, "These are the most challenging economic conditions a New Zealand Government has had to face in a long time," he said.
