Fitch downgrades its outlook for New Zealand because meaningful debt reduction is becoming 'more difficult to envisage' and the upcoming election adds uncertainty

Credit rating agency Fitch has downgraded the outlook for New Zealand's sovereign credit rating, although it maintained the core rating grade. 

For reference Moody's rates New Zealand at Aaa (Stable), and Standard & Poors rates it as AA+ (Stable). The relative comparisons between credit ratings is here.

Here is the Fitch statement announcing its change.

 Fitch Ratings has revised the Outlook on New Zealand's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'AA+'.

A full list of rating actions is at the end of this rating action commentary. [see links.]

The Outlook revision reflects our view that a substantial debt reduction is becoming more difficult to envisage, as fiscal consolidation has been delayed in the past few years. The general government debt-GDP ratio has increased substantially over the past six years as the economy has been buffeted by a number of shocks.

The rating reflects New Zealand's advanced and wealthy economy, high governance standards, and robust policy framework. These strengths are balanced by the economy's vulnerability to external shocks given its size and openness, an elevated current account deficit (CAD), and high household debt.

Key Rating Drivers

Delayed Debt Decline: We forecast general government gross debt to rise to 56% of GDP in the fiscal year ending June 2027 (FY27), from 53.6% in FY25, and to only return to the FY25 ratio in FY30. This would be well above the outer year (FY27) forecast of 36.1% when we upgraded New Zealand in September 2022. The debt reduction will be driven by a large 2.8pp of GDP improvement in the primary balance by FY30. The authorities project the net core crown debt-to-GDP ratio to reach 46.9% of GDP by FY29, above the 45.5% projection at the May 2025 fiscal update.

Fiscal Consolidation Further Delayed: The December 2025 fiscal update forecast that the government's key fiscal metric - operating balance before gains and losses excluding revenue and expenses of the accident compensation corporation (OBEGALx) - would return to surplus in FY30, one year later than in the May 2025 fiscal update. This follows repeated delays in the target year since December 2022 under successive governments. The delays are due to weak economic growth since then and expenditure proving more persistent than anticipated.

Near-Term Deficit Rise: The government expects the OBEGALx deficit to widen to 3% of GDP in FY26 from 2.1% in FY25 and improve thereafter to a 0.4% surplus by FY30. The actual FY25 OBEGALx deficit was slightly lower than the 2.3% assumed in the May 2025 fiscal update, but this largely reflected one-off factors.

We expect the deficit under Fitch's internationally comparable general government definition to rise to 4.1% of GDP in FY26 from 3.6% in FY25 before falling to 3.5% by FY27. The decline will be driven by the economic recovery, with some upside potential to revenue projections, and the consolidation policy after the election, which is scheduled for November 2026.

Post-Election Deficit Reduction: Significant fiscal consolidation measures are likely to occur only after the 2026 election, adding uncertainty to the fiscal outlook. There is broad political consensus for fiscal consolidation, and New Zealand has a pre-pandemic track record of debt reduction and fiscal prudence. The main change based on the election outcome could be the composition of the consolidation. The incumbent National Party-led coalition focuses on expenditure constraint, while a Labour Party coalition would emphasise revenue measures.

Government Assets: The government's superannuation fund holds about 20% of GDP in assets, including a substantial proportion in foreign assets. In addition, the central government's deposits were equivalent to 9.2% of GDP in 2025, moderately above the 'AA' category median, which could support financing and limit debt build-up.

Economic Recovery: We expect GDP to expand by 2.8% in 2026 and 2027, after weak growth of 0.2% in 2025. The recovery will be driven by improving household demand, supported by the monetary easing since August 2024 and the continued strong performance of exports. Recent data also suggest the net outward migration over the past few years is reversing in response to, and supporting, the recovery.

The Iran war poses some risks to the economy, given its substantial dependence on energy imports. Direct trade linkages to the Middle East are small, but inflationary effects and a broader global weakening could have a negative impact.

Monetary Policy Accommodative: The Reserve Bank of New Zealand (RBNZ) left the policy rate unchanged at its February 2026 meeting, after making 325bp in cuts since August 2024. We expect a rate hike by end-2026, as the economy recovers and the RBNZ reduces the degree of accommodation, although the Iran war could lead to earlier tightening. Inflation was at 3.1% as of end-2025, just above the CPI target range of 1%-3%. The unemployment rate remains high compared with recent years, having risen to 5.4% at end-2025 from 5.1% in 2024.

Elevated CAD: The CAD has narrowed to 3.7% of GDP in 2025 from 4.7% in 2024. This is well below the peak deficit of 9.0% in 2022, but much weaker than the 'AA' category median surplus of 8% in 2025. Net external debt remains elevated, reflecting a structural savings-investment gap. We forecast net external debt of 51.4% of GDP in 2026, while the 'AA' median is in a net creditor position of 29% of GDP.

Household Debt Risks: Household debt-disposable income rose to 166% in 3Q25 from 164% at end-2024. House prices have been falling since 3Q24 and were down 0.2% yoy in 3Q25. Financial-sector risks are mitigated by prudent macroprudential policies and sound bank capitalisation.

ESG - Governance: New Zealand has an ESG Relevance Score of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. New Zealand has a high WBGI ranking at the 97th percentile.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

- Fiscal: Lower confidence that general government debt/GDP will be put on a sustained downward path over the medium term from, for instance, insufficient fiscal consolidation, leading to a withdrawal of the +1 QO notch on public finances.

- Macro: A further delay of the economic recovery and the weaker medium-term growth outlook that would undermine fiscal consolidation prospects.

- External: Build-up of external vulnerabilities from, for instance, continued high CADs and a weaker external financing environment.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

- Public/External: Strengthened confidence towards fiscal consolidation could lead to a revision of the Outlook to Stable. A sharp decline in both public and net external debt, and increased confidence in New Zealand's resilience against external shocks, could result in an upgrade.

[This is only main part of the Full Fitch review. The full review is here.]