New Zealand: Staff Report for the 2006 Article IV Consultation

This 2006 Article IV Consultation highlights that following a vigorous expansion in recent years, a cyclical slowing in New Zealand’s economy commenced in 2005, with growth declining to 2¼ percent. Economic growth had averaged 4¼ percent annually in 2002–04, with domestic demand boosted by large migration inflows, wealth effects from rising housing prices, and income effects from high commodity prices. With slower growth easing resource pressures, inflation is expected to moderate, allowing an eventual easing in monetary policy.

Abstract

This 2006 Article IV Consultation highlights that following a vigorous expansion in recent years, a cyclical slowing in New Zealand’s economy commenced in 2005, with growth declining to 2¼ percent. Economic growth had averaged 4¼ percent annually in 2002–04, with domestic demand boosted by large migration inflows, wealth effects from rising housing prices, and income effects from high commodity prices. With slower growth easing resource pressures, inflation is expected to moderate, allowing an eventual easing in monetary policy.

I. Background

1. Growth slowed in 2005 after the vigorous expansion of recent years, but macroeconomic imbalances increased. Large migration inflows, wealth effects from rising house prices, and income effects from high commodity prices, were the underlying factors behind real GDP growth averaging 4¼ percent in 2002–04, while unemployment fell to 3½ percent, one of the lowest rates in the OECD (Table 1). However, inflation rose as resources became increasingly stretched. A cyclical slowing commenced in 2005, with growth declining to 2¼ percent, but the slowdown was narrowly based in the tradable sector, and the external current account deficit rose to 9 percent of GDP, double its 20-year average (Table 2).

A01ufig01

Real GDP Growth by Sector

(Percent change in 4-quarter total, y/y)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Statistics New Zealand1/ Manufacturing, agriculture, forestry & fishing, and exports of services.
Table 1.

New Zealand: Selected Economic and Financial Indicators, 2001–06

article image
Sources: Data provided by the New Zealand authorities; and Fund staff estimates and projections.

Based on national accounts data.

Fiscal years ending June 30. Revenue and expenditure estimates from 2002 are not directly comparable with those for previous years.

Equals revenue less expenditure plus net surplus attributable to state-owned and Crown entities.

Operating balance net of revaluations and changes in accounting rules (excluding net NZS Fund asset returns).

Data for 2006 are as of April 6.

IMF Information Notice System index (1990 = 100).

Table 2.

New Zealand: Balance of Payments and External Debt, 2001–06

article image
Sources: Data provided by the New Zealand authorities; and Fund staff estimates.

For 2001–04, based on IFS data.

Calculated as a residual.

2. With the New Zealand dollar historically high, exports waned while imports surged. The currency rose to a post-float high on a trade-weighted basis by December 2005, boosted by large capital flows associated with exceptional demand for New Zealand dollar denominated bonds from foreign retail investors in Japan and Europe—net offshore issues reached 15 percent of GDP in 2005 (Box 1). Total export volumes declined despite strong global activity, as the high exchange rate reduced manufactured exports and tourism, and dairy production fell owing to poor weather. Meanwhile, import growth remained rapid, led by capital goods.1

A01ufig02

Exports of Goods and Services

(In percent)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Statistics New Zealand

3. In contrast, domestic demand remained strong for much of 2005, owing to unexpected strength in the housing market. With migration inflows falling, the decline in house price inflation that began in 2004 was expected to continue, but house price inflation picked up to 15 percent y/y in 2005, supporting consumer spending. One factor facilitating the housing market revival was the continuation until late in 2005 of low “fixed-rate” mortgage interest rates despite rising official interest rates.2

A01ufig03

House Prices and Private Consumption

(Percent change, y/y)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Sources: Statistics New Zealand and Quotable Value.

4. Domestic demand has slowed more recently. Consumer confidence fell to 5-year lows in late 2005, reflecting rising mortgage rates and high fuel prices. At the same time, the high exchange rate and increasing labor and energy costs reduced business confidence to 20-year lows. More recent indicators, including retail sales, employment growth, and imports, have increasingly confirmed that a significant slowing in domestic demand growth is underway.

A01ufig04

Retail Sales and Consumer Confidence

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Statistics New Zealand and Westpac McDermott-Miller.

5. While underlying inflation is no longer increasing, the labor market remains tight. Headline CPI inflation rose to 3.3 percent y/y in March 2006, from 2.8 percent a year earlier, slightly exceeding the medium-term target range of 1 to 3 percent. However, almost half of this increase reflected the direct impact of higher oil prices, and most measures of underlying inflation leveled out during the past year. Moreover, resource pressures, as measured by capacity utilization and the difficulty of finding labor, have begun to ease as growth has slowed. Nonetheless, wages increased by 5½ percent y/y in 2005 compared to 4¾ percent in 2004 (measured by the unadjusted Labor Cost Index), suggesting that the labor market remains relatively tight. Inflation expectations have risen according to survey data, although expectations for two or more years remain within the target and short-run expectations have eased more recently.

A01ufig05

Underlying CPI Inflation

(Percent change, y/y)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Statistics New Zealand and RBNZ

6. Monetary policy is on hold after a further tightening in 2005. The RBNZ raised the official cash rate (OCR) by 75 basis points in 2005 to 7¼ percent, with two hikes late in the year prompted by the persistent strength in household spending. Growth in household credit remained around 15 percent y/y, and household debt rose to 150 percent of disposable income, despite RBNZ statements aimed at raising awareness about the potential risks of residential property investments and high indebtedness.

A01ufig06

Labor Market Conditions

(In percent)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Reserve Bank of New Zealand and Bloomberg
A01ufig07

Interest Rates

(Monthly average, percent)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Reserve Bank of New Zealand and Bloomberg

7. Exchange rate adjustment is finally underway. When the trade-weighted exchange rate index (TWI) peaked in early December 2005, the RBNZ stated that the exchange rate was “exceptionally and unjustifiably high” signaling that one of the criteria for considering foreign exchange intervention had been met, although, to date, no intervention has occurred.3 By early-April, the TWI had retraced 16 percent from its peak, with most of this decline occurring since mid-February.4 Nonetheless, the REER still remains about 9 percent above its 20-year average.

A01ufig08

New Zealand Dollar Exchange Rate

(Trade Weighted Index, June 1979=100)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Reserve Bank of New Zealand

8. Fiscal surpluses remain large. Strong revenues lifted the operating surplus (OBERAC excluding earnings of the New Zealand Superannuation Fund) to 5½ percent of GDP in 2004/05 (Table 3). The government’s December 2005 Half Year Economic and Fiscal Update (HYEFU) projects the 2005/06 operating surplus to fall to 4 percent of GDP (excluding write-downs of student loans), partly reflecting the expansion in support for low income families announced in 2004.5 In September 2005, the Labour party won its third term in government, with the support of minor parties. Though high surpluses made fiscal policy a key election issue, the spending allowance for 2006/07 was raised by just ¼ percent of GDP relative to earlier plans, with no increase for later years.6 The government has also initiated a review of business taxation, which is due to report by mid-2006.

Table 3.

New Zealand: Summary of Central Government Budget, 2000/01–2005/06 1/

article image
Sources: New Zealand Treasury; HYEFU (Half Year Economic and Fiscal Update, 2005).

Fiscal year ending June 30. Accounts follow New Zealand Generally Accepted Accounting Practices (GAAP). Changes have been made to the compilation of fiscal data starting in 2001/02; data prior to that date are not fully comparable.

A write-down of student loans raises expenditure (other) by 1 percent of GDP, and reduces the OBERAC by 0.6 percent of GDP.

Equals revenue less expenditure plus net surplus attributable to state-owned and Crown entities.

Operating balance net of revaluations and changes in accounting rules, and excluding net NZS Fund asset returns.

Fund staff estimate; equals cash flows from operations less cash flows on physical investment and advances.

Excludes contribution to the New Zealand Superannuation Fund.

Includes financial assets of the New Zealand Superannuation Fund, which are excluded from net core Crown debt.

A01ufig09

Real Effective Exchange Rate

(Percent deviation from 1986–2005 average)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Information Notice System and staff estimates.
A01ufig10

Central Government Operations

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

II. Report on the Discussions

A. Economic Outlook and Risks

9. Sluggish growth is expected in 2006. The recent slowing in domestic demand is expected to continue, reducing real GDP growth to about 1 percent in 2006 (Table 5). Rising mortgage interest rates will contribute to the downturn—an estimated 40 percent of fixed-rate mortgages are to be repriced in 2006, with an average expected interest rate increase of about 1 percentage point. Given the elevated level of house prices relative to household incomes and rents, the authorities expect house prices to flatten out in 2006, thereby slowing demand, as experienced in Australia and the United Kingdom in recent years. Lower housing market turnover in December to February suggests that a turning point in house prices may be near, although such predictions have in the past not always proved accurate.

Table 4.

New Zealand: Central Government Operations, SNA Estimates, 1999/00–2007/08 1

article image
Source: New Zealand Treasury, Half Year Economic and Fiscal Update, December 2005.

Accounts follow New Zealand System of National Accounts standards. See: http://www.treasury.govt.nz/snaforecasts/default.asp

Net lending excluding net interest payments, or current revenue net of current primary expenditure and net capital spending.

Sum of current primary spending (excluding depreciation) and gross capital spending.

Table 5.

New Zealand: Medium-Term Scenario, 2005–11

article image
Sources: Data provided by the New Zealand authorities; and Fund staff estimates and projections.

Fund staff estimates; calculated as residual from gross national investment and external current account balance.

Fiscal years ending June 30. Figures from 2002 are not directly comparable with the historical data.

Equals revenue less expenditure plus net surplus of state-owned and Crown entities.

Operating balance net of revaluations and changes in accounting rules (excluding net NZS Fund asset returns). In 2006, the OBERAC is reduced by $1024 million, or 0.6 percent of GDP, by accounting write downs of student loans.

Includes the financial assets of the New Zealand Superannuation Fund, which are excluded from net Crown debt.

Data for end-December. Data from 2001 comply with BPM5 and are not directly comparable with prior data.

A01ufig11

House Prices

(1999=100)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Sources: RBNZ and Australian Bureau of Statistics.

10. Growth is expected to strengthen once the economy rebalances. Although inflation would remain near the top of the target range in 2006, the authorities expect it will decline as resource pressures further unwind, allowing an eventual easing in monetary policy. The authorities also expect the exchange rate to continue declining to more typical levels over the next few years, which is consistent with IMF staff estimates that by December 2005, the New Zealand dollar was 10-25 percent above medium-term equilibrium (based on a combination of the macroeconomic balance approach and a modified PPP framework). Net exports would accelerate as the tradable sector responds to the lower exchange rate, but domestic demand growth may remain modest, partly because real house prices could decline moderately for a number of years as in previous housing cycles. Staff project real GDP growth to rise to about 2 percent in 2007, and return to trend levels from 2008, while the external deficit would narrow substantially over the medium term.

11. While the central outlook is for a soft landing, the authorities have given thought to less favorable scenarios.7 For example, the HYEFU considered a situation of generalized weakness in demand and exports, that would reduce the growth projection by 1 percentage point in the year ended March 2007. Similarly, the RBNZ’s December 2005 Monetary Policy Statement allowed for a sharper correction of imbalances, with domestic demand growth and the exchange rate falling more rapidly than in the baseline. Another possibility, although this seems less likely now than at the time of the mission, is that the slowing in demand is deferred, in which case a hard landing could occur later. In such a scenario, continued momentum in the housing market would sustain strong demand in 2006, lifting inflation and resulting in additional monetary tightening, followed by an eventual sharper correction in house prices and domestic demand. The authorities also agreed that external shocks, such as further oil price increases or a fall in U.S. economic growth, could trigger a harder landing.8

12. Risks of a harder landing remain, but are mitigated by the strength of balance sheets. Domestic demand could still weaken more sharply in the near term, but strong labor income growth and fiscal stimulus cushion such downside risks. Moreover, the recent slowing in demand and depreciation of the exchange rate appear to have diminished the risks of a later hard landing. Although the housing market remains a source of some uncertainty, the authorities consider that the banking sector is robust to a scenario with more significant house price declines. In particular, the authorities have monitored developments in bank lending practices, noting some expansion in loans with high loan-to-value ratios, or lower documentation of debtor’s income, but consider that banks continue to allocate and price these risks appropriately so that risks to bank capital have not increased substantively. Hence, the banking sector stress tests conducted by the 2004 FSAP, which found a high degree of financial soundness, continue to be germane. In addition, corporate and private sector balance sheets generally remain strong, although households have likely become more sensitive to interest rate pressures. 9

B. Macroeconomic and Financial Sector Policies

13. The government plans to raise spending significantly over the medium term as gross debt declines. Non-interest current spending is projected to rise to 32½ percent of GDP in 2007/08, from 30 percent on average in the three years to 2004/05 (Table 4). This expansion is fully consistent with meeting the government’s medium-term fiscal objectives; the HYEFU projects the operating balance to remain in surplus by 2 percent of GDP by 2007/08, gross debt to fall below 20 percent of GDP by 2009/10, and net worth to rise by 6 percentage points of GDP over the same period.10

A01ufig12

Central Government Operations

(SNA basis, in percent of GDP)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: New Zealand Treasury, Half Year Economic and Fiscal Update 2005

14. The medium-term orientation of fiscal policy continues to serve New Zealand well. The floating exchange rate regime provides New Zealand’s small open economy with a crucial shock absorber against external events such as major swings in commodity prices, and has permitted monetary policy to act as the primary lever to lean against cyclical developments. By contrast, fiscal policy has provided support through the operation of automatic stabilizers, an approach that has enhanced the predictability and prudence of fiscal policy, contributing to macroeconomic stability. According to Treasury estimates, current fiscal plans imply an estimated fiscal stimulus of about ½ percent of GDP in 2006/07 and 1¼ percent of GDP in 2007/08. Assuming the slowdown proceeds as projected, staff judged these plans to be consistent with the authorities’ goal of managing the fiscal position to avoid exacerbating pressures in the economy. Moreover, if the economy was to slow more rapidly, there is ample room for monetary policy maneuver.

15. Nonetheless, in certain circumstances, a degree of flexibility in fiscal policy might be useful. Although the scenario now looks less likely, staff questioned whether there was scope for running a somewhat tighter fiscal policy should domestic demand continue to be strong and imbalances threaten to persist. In a situation with a continued high exchange rate, along with high house prices and household indebtedness, relying solely on monetary policy to respond to stronger demand could increase the risks of an eventual harder landing.11 Staff therefore questioned whether there was any flexibility to defer part of the planned increase in spending should this be necessary. Although the 2006/07 budget was largely finalized, the authorities noted that they still had some scope to manage the NZ$1.9 billion in new spending planned for 2007/08. However, the Finance Minister saw little prospect that such flexibility would be needed given the slowing economy.

16. Ensuring “value for money” and sustained growth benefits from the additional fiscal resources will be crucial. Staff welcomed the government’s plans to review expenditure across departments and agencies at a time when relatively rapid growth in spending could undermine expenditure efficiency in the public sector. Moreover, the government’s efforts to maintain wage discipline in the public sector were particularly important given the relatively tight labor market. Staff encouraged the government to focus the extra fiscal resources on strengthening the drivers of sustained economic growth, in order to boost medium-term economic prospects and enhance New Zealand’s capacity to manage long-run fiscal challenges. In this respect, staff looked forward to the conclusions of the review of business taxation, which has the overarching aim to encourage investment and promote productivity. Tax competitiveness with Australia, along with incentives for tax planning created by the gap between the 33 percent company tax rate and the top personal income tax rate of 39 percent, appeared to be possible issues for reform in an otherwise very sound tax system.12

17. A period of stability in the stance of monetary policy is appropriate with the risks to underlying inflation now more balanced around a declining path. In the March 2006 Monetary Policy Statement, the RBNZ noted that prospects for an economic slowdown and easing resource pressures had been further confirmed. Hence, it did not expect to raise the OCR again in this cycle, so long as inflation risks, in particular from the labor and housing markets, remain under control. Staff agree that decisions to further tighten policy would need to be carefully weighed, particularly given the monetary contraction already in the pipeline. The RBNZ also did not expect to be in a position to ease policy in 2006, because labor market and resource pressures would take some time to dissipate. Though an earlier easing was possible, this would require a more rapid reduction in domestic inflation pressures than currently projected.

A01ufig13

Household Interest Payments

(Percent of disposable income)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Reserve Bank of New Zealand and staff calculations.1 Based on mortgage rate projections from RBNZ Monetary Policy Statement, Mar. 2006, and assuming that household credit growth slows to 11 percent in 2006 and 7 percent in 2007, such that household debt rises to 160 percent of disposable income.

18. The authorities have welcomed the recent depreciation of the exchange rate. Staff endorsed the RBNZ’s statements in late 2005 regarding the overly high level of the New Zealand dollar, but agreed that the extent to which these statements had contributed to the subsequent depreciation was unclear. Further currency declines may occur, and staff supported the RBNZ’s position that it would look through the first-round inflation effects of a depreciation and not tighten monetary policy as long as inflation expectations remain anchored. Experience during the 20 percent depreciation in mid-1998 to end-1999 suggests that expectations would be well behaved in the context of a slowing economy.

19. Banking sector policies have progressed and a new supervisory framework for non-bank financial institutions is being developed. An important step forward was the agreement with Australia on the legislative foundations for enhanced home-host banking supervision arrangements.13 Plans to conduct joint Australia-New Zealand crisis preparedness exercises are one example of closer ongoing cooperation with the Australian Prudential Regulatory Authority. The authorities have also continued to address issues highlighted by the 2004 FSAP.14 In this context, the capacity to conduct stress tests, particularly in relation to households’ capacity to service debt, is being strengthened. The RBNZ’s November 2005 Financial Stability Report points to the general soundness of the financial sector, but raises concerns about the robustness of some finance companies, especially those exposed to property development. Although the macro-economic risks are limited by the small scale of these companies, staff supported the authorities’ decision to establish a new supervisory framework for non-bank financial institutions.

III. Staff Appraisal

20. New Zealand’s economy has slowed after a period of strong growth, and while the current account deficit widened in 2005, the economy has started to rebalance. Net exports were undermined by the historically high exchange rate in 2005, which was supported by large capital inflows associated with exceptional foreign demand for New Zealand dollar denominated bonds in a world of low international interest rates. Hence growth slowed to 2¼ percent even as domestic demand remained strong with a revival in the housing market, and the external current account deficit rose to 9 percent of GDP. At the same time, with resources tightly stretched and global oil prices increasing, inflation edged up to the top end of the 1-3 percent medium-term target range. More recently, domestic demand appears to have slowed and the exchange rate has depreciated significantly. While growth is expected to be sluggish in 2006, an export-led recovery is expected in 2007, with the current account deficit narrowing over the medium term.

21. Budgetary plans cushion downside risks to the outlook. The Half Year Economic and Fiscal Update projects the operating surplus to decline to 2 percent of GDP by 2007/08, from 4 percent of GDP in 2005/06. This decline is fully consistent with meeting the government’s prudent medium-term fiscal objectives, and the associated fiscal stimulus should not exacerbate pressures in the economy given the expected pace of slowing in activity. In the case of a sharper-than-expected downturn, monetary policy provides the first line of defense within New Zealand’s well-established macroeconomic framework, while fiscal policy should contribute through the full play of the automatic stabilizers.

22. Monetary policy should continue to steer a steady course in the near term. Underlying inflation is expected to decline as resource pressures ease, and given the lagged effects of previous tightening still to come, the current pause in monetary policy tightening is appropriate. However, with the labor market remaining tight, there is little room to cut rates in the near term. By contrast, there is ample room for maneuver if the economy slows more abruptly. The recent depreciation of the exchange rate is welcome, and with the slowing economy anchoring inflation expectations, monetary policy is well placed to “look through” a temporary rise in headline CPI inflation arising from a decline in the currency.

23. Recent and prospective advances in the financial sector regulatory framework will further enhance financial and hence macroeconomic stability. The financial sector is sound, but close monitoring of households’ debt service capacity will need to continue given the rise in household indebtedness. The agreement with Australia regarding arrangements for enhanced home-host supervision is particularly welcome as close cooperation with bank supervisors across the Tasman will be essential, especially in the case of banks experiencing distress. A new regulatory framework for non-bank financial institutions will take time to establish, but will facilitate the further development of New Zealand’s financial system and promote growth.

24. It is proposed that the next Article IV consultation with New Zealand take place on the standard 12-month cycle.

Eurokiwi and Uridashi Bond Issues and New Zealand’s External Financing 1

There has been a rapid expansion in offshore issues of New Zealand dollar (NZD) denominated Eurokiwi and Uridashi bonds over the last few years. Widely recognized foreign entities with a high credit standing are the main issuers of these bonds, as they are able to profit by issuing NZD denominated bonds and then swapping the proceeds for foreign currency borrowed abroad by New Zealand banks. At a time when international interest rates have been low, retail investors in Europe or Japan looking for high yields have been the main buyers of these offshore NZD bonds, which are called “Eurokiwis” or “Uridashis” when issued in Japan. These retail investors are buyers of NZD dollars when they purchase the bonds and sellers of NZD when the bonds mature. Thus the Eurokiwi and Uridashi markets provide support to the NZD during periods of positive net issuance.

A01ufig14

Offshore New Zealand Dollar Denominated Bond Issuance

(in billions of New Zealand dollars)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Source: Reserve Bank of New Zealand.

Debt instruments were a major source of external financing in 2004–05, led by New Zealand banks’ funding of mortgage lending, typically by tapping international capital markets in U.S. dollars (USD). The highly liquid swap market in New Zealand dollars (NZD) enables banks to manage their exchange rate and interest rate risks. Most new mortgage loans have interest rates that are fixed, yet New Zealand banks tend to borrow at floating rates. To match liabilities and assets, the banks use cross-currency swaps, selling the USD funds they have raised for NZD, and at the same time, exchanging their USD floating rate debt for NZD debt with a fixed interest rate. The swap rate that banks pay on the NZD debt represents the marginal cost of New Zealand dollar funding for banks and is used to price fixed-rate mortgages.

The outstanding stock of NZD denominated Eurokiwi and Uridashi bonds is historically high and significant maturities are coming due. Net issues of offshore NZD denominated bonds were NZ$23 billion in 2005, and the outstanding stock rose to NZ$50.2 billion at end-February 2006, which is about one third as large as the foreign debt owed by New Zealanders. Maturities on these bonds are estimated at NZ$9 billion in 2006 and NZ$17 billion in 2007. In the past, a build up in maturities has unwound in orderly fashion with net offshore issuance of NZD denominated bonds declining in tandem with easing credit demand in New Zealand; however, maturity volumes are notably larger in this cycle.

1 Further discussion is provided in David Drage, Anella Munro and Cath Sleeman, “An update on Eurokiwi and Uridashi bonds,” Reserve Bank of New Zealand Bulletin, 2005, Vol. 68 No. 3.
Figure 1.
Figure 1.

New Zealand: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2006, 160; 10.5089/9781451830323.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ This scenario assumes foreign exchange hedging covers 87 percent of foreign currency debt, consistent with the findings of hedging surveys conducted by Statistics New Zealand.

ANNEX I: New Zealand: Fund Relations (As of February 28, 2006)

I. Membership Status: Joined: 08/31/1961; Article VIII

II. General Resources Account:

article image

III. SDR Department:

article image

IV. Outstanding Purchases and Loans: None

V. Financial Arrangements: None

VI. Projected Obligations to Fund: None

VII. Exchange Arrangement:

New Zealand accepted the obligations of Article VIII on August 5, 1982. The New Zealand dollar has floated freely since March 1985. New Zealand maintains an exchange system that is free of restrictions on international payments and transfers for current and capital transactions.

VIII. Article IV Consultation:

New Zealand is on the 12-month consultation cycle. The 2005 Article IV consultation discussions were held during February 7-16, 2005, the Executive Board discussed the staff report (IMF Country Report No. 05/152) and concluded the consultation on May 2, 2005.

IX. FSAP Participation and ROSCs:

FSAP mission took place during October 30-November 18, 2003. The FSSA and the Detailed Assessment of Observance of IOSCO Objectives and Principles of Securities Regulation were published under Country Reports No. 04/126 and No. 04/417, respectively.

X. Technical Assistance: None

XI. Resident Representative/Advisor: None

ANNEX II: New Zealand: Statistical Issues

The New Zealand authorities publish an array of high-quality statistics which are fully adequate for surveillance purposes. The frequency, timeliness, and availability of common indicators required for Fund surveillance are summarized in the attached table. Economic and financial data are readily available electronically from the websites of Statistics New Zealand, the Reserve Bank of New Zealand, and the New Zealand Treasury.

The authorities are continuing to enhance data quality and expand the range of data products available. For example, Statistics New Zealand has undertaken a range of projects to improve balance of payments statistics in the areas of travel debits, trade in other services (services excluding transport, travel, and insurance), and debt securities transactions. To increase the range of information available, investigations into inward foreign affiliate trade statistics and ultimate investors using available data have been undertaken and results published. The New Zealand Treasury is leading a project to publish fiscal data consistent with the Government Finance Statistics Manual 2001 (GFSM 2001) and regularly submits annual general government sector data for inclusion in the GFS Yearbook. Stocks of financial assets and liabilities are reported for all levels of government, and related flows are reported for levels except local government.

New Zealand has made further progress toward becoming a subscriber to the Special Data Dissemination Standard (SDDS). All SDDS requirements are being met for monetary data, and timeliness requirements for central government fiscal data were met in 2005. While external debt data continue to be collected and published in official series on the basis of residual maturity, estimates of external debt by original maturity—as required by SDDS—are prepared. The remaining issues are the requirement for publication of an industrial production index, re-dissemination of 3- and 6-month forward exchange rates, and the timeliness of local government data, where the authorities are exploring the feasibility of earlier publication.

New Zealand: Table of Common Indicators Required for Surveillance

(As of April 7, 2006)

article image

includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. The New Zealand Treasury is leading a project to prepare fiscal data on a GFSM 2001 basis.

Including currency and maturity composition.

Daily (D); Weekly (W); Monthly (M); Bi-monthly (B); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

1

Chapter I of the forthcoming Selected Issues paper finds that the high exchange rate has reinforced the effect of strong domestic demand on imports.

2

Fixed-rate mortgages account for about four-fifths of total mortgages in New Zealand. They are similar to adjustable rate mortgages in the United States, with rates usually reset at 1 to 3 year intervals.

3

Under the policy adopted in March 2004, the other criteria required for the RBNZ to contemplate intervention are that it would be consistent with the objectives of monetary policy, and that an opportunity would exist for it to be effective.

4

The exchange rate began to decline once weak economic data was released that markets interpreted as indicating an end to the monetary tightening cycle. At the same time, concerns about the end of the global carry trade weakened sentiment toward a number of currencies, including the New Zealand dollar. In this environment, the issuance of New Zealand dollar-denominated Uridashi issues dried up in March, although this may also be associated with reduced demand by New Zealand banks for funds in line with the cooling economy.

5

The overall fiscal surplus on an SNA basis (net lending in Table 4) is projected at 3 percent of GDP in 2005/06, which is exceeded only by Norway and Singapore among the advanced economies.

6

The key measures adopted, effective April 2006, were an expansion in the number of working families qualifying for income support; making student loans interest free under certain conditions; and, for the duration of the current parliament, an increase in pension benefits by 1 percentage point to 66 percent of average wages.

7

Chapter II of the forthcoming Selected Issues paper discusses the macroeconomic risks posed by external imbalances in advanced economies.

8

The high degree of hedging of foreign exchange risks is a key factor reducing New Zealand’s economic vulnerability, as seen in the robustness of the external debt position to shocks (see Figure 1). The New Zealand authorities have also made contingency plans in the case of an avian flu pandemic, including by actively working with financial institutions to promote adequate business continuity planning: see http://www.moh.govt.nz/pandemicinfluenza and http://www.rbnz.govt.nz/crisismgmt/2176891.pdf.

9

Chapter III of the forthcoming Selected Issues paper analyzes New Zealand’s vulnerabilities from a sectoral balance sheet perspective and includes the standard Financial Soundness Indicators.

10

The key objective is to slowly reduce gross debt to below 20 percent of GDP before 2015, while making contributions to the NZ Superannuation Fund, which are currently 1½ percent of GDP per annum.

11

Discretionary management of fiscal policy faces substantial practical difficulties, but may have a role in the context of a high exchange rate or asset prices, see Ramakrishnan and Zhang, “Macroeconomic Policy Coordination and Short-term Economic Stabilization,” IMF Country Report No. 04/127.

12

For further details see the Inland Revenue Department’s Briefing for the Incoming Minister: http://www.taxpolicy.ird.govt.nz/publications/files/bim2005.pdf.

13

The key elements of the legislative changes proposed by the Trans-Tasman Council on Banking Supervision are described at: http://www.rbnz.govt.nz/finstab/banking/supervision/2420258.html.

14

The RBNZ has finalized its policy on outsourcing and issues of local bank incorporation have been resolved. Lender of last resort and failure management policies have been further operationalized, and disclosure requirements have been expanded to cover the quality of large exposures.

New Zealand: Staff Report for the 2006 Article IV Consultation
Author: International Monetary Fund