Fitch Ratings affirmed Australia's ratings and stable outlook on Thursday but said currency strength and a heated housing market were the two main threats to the economy.
Fitch affirmed Australia's long-term foreign currency rating of AA+ and its long-term local currency rating of AAA. The short-term foreign currency rating was affirmed at F1+.
"Two factors dominate the macroeconomic outlook," said Paul Rawkins, Senior Director at Fitch Sovereign Ratings.
"The strength of the Australian dollar and the future course of house prices."
Australia's average house prices have doubled in just six years in a long boom that some analysts and policy makers say is an asset-price bubble.
Household debt had reached record levels above 140 percent of disposable income, the highest in the Organisation for Economic Development and Co-operation (OECD), Fitch said.
Any sharp fall in house prices could deliver a "hard landing," putting the Australian economy's unbroken 13-year growth record at risk, Fitch said, adding that housing had been an important part of Australia's economic success since 2000.
Meanwhile, an appreciation of almost 50 percent in the Australian dollar since the end of 2001 was worsening Australia's current account deficit, which stands at about 6 percent of gross domestic product, and countering the benefits of higher prices on commodity exports.
"Were the Australian dollar to maintain this pace of appreciation, exports could falter and the current account deficit could widen further, worsening the external debt ratios," Fitch said.
"The strong Australian dollar is complicating monetary policy, limiting the authorities' scope to raise interest rates to cool the buoyant property market and contain record high household debt," it said.
However, the ratings agency expected the currency to stabilise close to current levels of around 76 US cents this year, before weakening a little in 2005.
That would allow exports to rise on the back of strong Asian demand, high commodity prices and recovery from drought.
It also said Australia had a strong financial system. Banks had few bad debts and held capital considerably above minimum requirements.
"Australia continues to outperform most other advanced industrial economies on the back of sound macroeconomic policies," Fitch said.
"A decade and a half of structural reforms have raised productivity growth and significantly reinforced Australia's resilience to shocks. Fiscal surpluses are now regarded as the norm," it said.
Australia's general government debt of 18 percent of gross domestic product was among the lowest of any AAA-rated sovereign, it said.
However, persistent current account deficits, high net external indebtedness and low international liquidity were key constraints on Australia's sovereign rating.
External liabilities continued to mount in 2003 as interest differentials induced investment from abroad while local banks funded robust demand for property through greater offshore borrowing, it said.
Standard & Poor's long-term currency rating for Australia is AAA and its short term currency rating is A-1+, with a stable outlook.
Moody's Investors Service has a long-term domestic and foreign currency rating for Australia of Aaa, with a stable outlook.