Source: Morningstar DBRS
August 23, 2026
DBRS, Inc. (Morningstar DBRS) confirmed New Zealand’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, Morningstar DBRS confirmed New Zealand’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all credit ratings is Stable.
KEY CREDIT RATING CONSIDERATIONS
New Zealand’s AAA credit ratings are underpinned by the country’s fundamental strengths, including its effective policy frameworks, strong central bank credibility, and robust governing institutions. Although the public debt-to-GDP ratio has risen in recent years amid successive shocks, the debt burden remains moderate relative to other advanced economies. The government is pursuing a gradual fiscal consolidation strategy, and New Zealand benefits from a longstanding cross-party commitment to prudent fiscal management, thereby limiting election-related uncertainty around the consolidation path. New Zealand’s small and open economy is vulnerable to external shocks, but the country’s structural strengths, including a flexible exchange rate, provide substantial buffers.
The Stable trend reflects Morningstar DBRS’ expectation that New Zealand’s fundamental strengths will support an economic recovery over the next few years and that the government will make progress with its fiscal consolidation plan. The economy began to recover last year, supported by strong export commodity prices and accommodative monetary policy. The U.S.-Iran war temporarily dampened growth momentum early this year, as higher energy prices renewed inflationary pressures and weighed on domestic demand. In addition, the Reserve Bank of New Zealand’s (RBNZ) started to withdraw monetary stimulus, raising the OCR by 25 bps to 2.50% in July. Morningstar DBRS anticipates further hikes to bring inflation back to target, while spare capacity should also help contain underlying price pressures. The IMF expects the recovery to pick up in the second half of this year, with growth of 2.0% in 2026 and 2.7% in 2027, supported by strong primary exports and a recovery in domestic demand as the energy shock fades.
CREDIT RATING DRIVERS The credit ratings could be downgraded due to one or a combination of the following factors: (1) absence of fiscal consolidation over the medium term, or (2) a severe financial or external shock, leading to a prolonged deterioration in growth prospects.
CREDIT RATING RATIONALE
Gradual Fiscal Consolidation Underway, But Further Delays Remain a Risk
New Zealand’s fiscal deficit remains elevated following the pandemic and a period of subdued growth, but the government is pursuing a gradual, expenditure-led fiscal consolidation as the economy recovers. The government’s preferred fiscal measure OBEGALx (the operating balance before gains and losses excluding Accident Compensation Corporation (ACC) revenue and expenses) is estimated to have widened to a 2.6% of GDP deficit in FY25-26, from 2.1% in FY24-25. This higher deficit reflects weak cyclical tax revenue, increased benefits and pension payments, and higher debt servicing costs. In general government terms, the IMF projects a fiscal deficit of 3.9% in 2026. Successive economic shocks have delayed the consolidation, but the government is also phasing the adjustment to avoid constraining the economic recovery. The government projects the deficit will modestly narrow to 2.4% in FY26-27, before declining more quickly and shifting to a small surplus in FY28-29. Expenditure restraint is expected to lead the fiscal improvement, with stronger growth and bracket creep also supporting revenues. Nevertheless, the backloaded nature of the adjustment leaves the consolidation path vulnerable to downside risks. Softer near-term growth, rising social spending, and higher borrowing costs could slow fiscal repair, while growing defence and demographic spending pressures may make sustained expenditure restraint increasingly difficult.
Amid higher fiscal deficits, government debt has increased. New Zealand’s general government gross debt-to-GDP ratio rose from 32% in 2019 to 55% in 2025. The IMF projects the debt ratio will peak at 58% in 2027 and 2028 and then marginally decline, reaching 55% in 2030. New Zealand’s debt ratio remains moderate compared to other advanced economies, and the projected downward trajectory would help strengthen the credit profile. Sustaining sufficient fiscal buffers will be important to preserve the government’s capacity to respond to future shocks without materially weakening debt dynamics or fiscal sustainability. The debt profile is also supported by New Zealand’s sizeable Crown assets in the form of state-owned enterprises, the Superannuation Fund, and the ACC’s investment fund. According to the IMF, New Zealand’s net debt ratio stood at 26% of GDP in 2025, one of the lowest among advanced economies. The interest cost-to-GDP ratio also remains low relative to peers, supported by New Zealand’s moderate debt burden and substantial public sector financial assets.
RBNZ Begins Withdrawing Monetary Stimulus Amid Renewed Inflation; Housing Market Remains Subdued
The RBNZ has started to withdraw monetary accommodation in response to renewed inflation pressures. Prior to the U.S.-Iran war, headline inflation was slightly above target, reflecting persistent administered and other non-tradables price pressures. However, higher petrol and diesel prices lifted annual headline inflation to 4.1% in the second quarter, compared with 2.9% excluding fuel. Headline inflation has likely peaked and should ease as the energy shock fades and the pass-through to other prices remains limited. In July, the RBNZ raised the OCR by 25 bps to 2.50% to limit second-round effects. The increase represents a withdrawal of stimulus, rather than a shift to restrictive policy. The RBNZ expects inflation to ease towards the 2% midpoint in mid-2027, with subdued demand and a soft labour market supporting disinflation.
New Zealand’s housing market remains subdued following the sharp post-pandemic correction. House prices surged during the pandemic due to strong demand, fiscal stimulus, and low interest rates, before tighter financing conditions sparked a sizeable correction in 2022 and 2023. House prices have since broadly stabilized and remain about 13% below the 2021 peak (to the fourth quarter of 2025). However, more recently, renewed softness has emerged as the prospect of higher borrowing costs, economic uncertainty, and weaker growth weigh on demand. Increased listings relative to subdued buyer demand are limiting upward price pressure, even as New Zealand continues to face a longer-term housing supply shortage.
Financial stability risks related to the housing market appear contained. Non-performing loans and mortgage arrears have declined from their recent peaks. While mortgage holders have recently refixed at lower rates, the RBNZ expects this trend to reverse, with borrowing refixing at higher rates on average by March 2027 as financial conditions tighten. Relatively short fixed-rate mortgages are prevalent in New Zealand, which accelerate the transmission of interest rate changes to households. Most mortgage borrowers appear well-positioned to manage higher mortgage payments. Even if loan losses were to rise, the banking sector has strong buffers to absorb increases. Banks are well-capitalized, profitable, and liquid, while macroprudential measures help contain riskier mortgage lending. Even under more adverse conditions, New Zealand’s financial system should remain sound, and banks’ robust balance sheets and profitability should continue to support lending to the private sector.
Solid Medium-Term Growth Prospects Despite External Vulnerabilities
New Zealand has a strong record of economic growth, with real GDP expanding by an average pace of 2.8% per year between 1990 and 2019. Structural reforms implemented in the 1980s and early 1990s transformed the Kiwi economy from a highly regulated and protected system into a more open and competitive economy. Rapid growth in China also supported the expansion through strong demand for New Zealand’s commodity exports and services, particularly tourism. Although growth is likely to moderate from the pace recorded over the past 30 years, medium-term growth prospects remain comparatively solid. The IMF estimates potential growth at 2.2%, above most advanced-economy peers. Comparatively weak labour productivity levels, however, continue to constrain the outlook. Additionally, New Zealand’s small, open economy remains vulnerable to external and environmental shocks, including commodity price volatility, tourism downturns, and natural disasters such as earthquakes and tsunamis.
New Zealand has run current account deficits for decades, largely due to a negative income and transfer balance. The current account deficit peaked at 9.0% of GDP in 2022 as strong import demand, weak tourism, and deteriorating terms of trade widened the trade deficit. Since then, the current account deficit narrowed, reaching 3.7% of GDP in the first quarter of 2026 (on a rolling 4 quarter basis). The improvement reflects stronger external demand, improved terms of trade, and weak import demand, all of which have helped to bring the trade deficit close to balance. Morningstar DBRS expects the current account deficit to slightly widen this year due to higher energy-related import costs, before narrowing gradually over the medium term. New Zealand’s small and open economy in tandem with its persistent current account deficit makes it vulnerable to external shocks. However, exchange rate flexibility continues to help the Kiwi economy adjust to evolving global conditions. While New Zealand’s net international liability position remains elevated at 43% of GDP (at the end of the first quarter of 2026), it has improved in recent years, and balance sheet risks from currency volatility appear limited. These mitigating factors, together with substantial net errors and omissions in New Zealand’s balance of payments statistics, support Morningstar DBRS’ one-category adjustment to the ‘Balance of Payments’ building block assessment.
Strong Governing Institutions Underpin New Zealand’s AAA Credit Ratings
New Zealand’s robust institutions and stable political environment are fundamental strengths of the sovereign credit profile. New Zealand is a stable, parliamentary democracy with effective governing institutions. The political environment is characterized by strong rule of law, low levels of corruption, and high regulatory quality. For over 80 years, governments have formed around either the Labour or National Party, reflecting the stability of New Zealand’s party system. New Zealand’s proportional voting system commonly results in coalition governments, requiring cooperation among coalition partners to pass legislation.
General elections will be held in early November, with the incumbent centre-right National-led government seeking a second term. The National Party governs in coalition with ACT New Zealand and New Zealand First, holding a combined total of 67 out of 122 seats. Polling for the upcoming election remains tight between the two major parties, leaving support of smaller parties likely pivotal for the next government’s formation. Economic conditions, cost-of-living pressures, and fiscal management remain the key issues shaping the current political landscape.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (July 20, 2026) https://dbrs.morningstar.com/research/485522 [1].
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments at https://dbrs.morningstar.com/research/487780 [2].
Notes: All figures are in New Zealand dollars unless otherwise noted. Public finance statistics reported on a general government basis unless specified.