Abstract
This Selected Issues paper analyzes whether cyclical factors, including the large real exchange rate appreciation in recent years in New Zealand, can account for the rapidity of the recent rise in import penetration, or whether more lasting structural changes, such as the effects of globalization, may have played a role. The paper also looks at New Zealand’s vulnerabilities from two angles. It evaluates the external position of the country, and then assesses the health and soundness of various sectors of the economy by looking at their balance sheets and the key vulnerability indicators.
III. Economic Vulnerabilities: Looking at Sectoral Balance Sheets12
A. Overview
1. An examination of New Zealand’s economic vulnerabilities is timely given the recent widening of the current account deficit. New Zealand’s net foreign liabilities have been high relative to other advanced economies since the early 1990s. The current account deficit reached 9 percent of GDP in 2005, and net external liabilities increased to 90 percent of GDP. So far, high foreign liabilities have not become a source of instability, because foreigners have been willing to finance the current account deficit. However, the willingness of foreigners to do this in the future depends on their assessment of ability of New Zealand borrowers to repay their debts. Since these are mostly private borrowers, the level of risk to financial stability from high external liabilities depends not only on macroeconomic factors, but also on the health and soundness of the private entities that created those liabilities in the first place.
Net Foreign Liabilities in Percent of GDP, end-2004
Citation: IMF Staff Country Reports 2006, 161; 10.5089/9781451830330.002.A003
Net Foreign Liabilities in Percent of GDP, end-2004
Citation: IMF Staff Country Reports 2006, 161; 10.5089/9781451830330.002.A003
Net Foreign Liabilities in Percent of GDP, end-2004
Citation: IMF Staff Country Reports 2006, 161; 10.5089/9781451830330.002.A003
New Zealand: Key External Vulnerability Statistics
New Zealand: Key External Vulnerability Statistics
| 1993 | 1998 | 2002 | 2003 | 2004 | 2005 | 2005 | |||
|---|---|---|---|---|---|---|---|---|---|
| Mar. | Mar. | Mar. | Mar. | Mar. | Mar. | Dec. | |||
| (In percent of GDP) | |||||||||
| Current account (annual) | -3.6 | -5.4 | -3.3 | -3.6 | -4.8 | -7.4 | -8.8 | ||
| Net foreign liabilities | 88.3 | 88.0 | 79.5 | 77.4 | 78.6 | 82.7 | 88.6 | ||
| Gross external debt | 78.4 | 84.3 | 113.5 | 109.6 | 107.2 | 111.6 | 107.0 | ||
| Of which: | |||||||||
| Local currency denominated | … | 45.4 | 54.3 | 57.2 | 54.2 | 55.2 | 54.3 | ||
| Short-term (residual maturity) | … | 39.6 | 60.2 | 52.9 | 52.3 | 56.8 | 54.4 | ||
| Official government | … | 20.1 | 16.1 | 13.6 | 13.1 | 11.6 | 11.7 | ||
| Foreign-currency denominated external debt | … | 38.9 | 59.2 | 52.5 | 53.0 | 56.4 | 52.6 | ||
| Share of which hedged (in percent) | … | 94.9 | 94.4 | 89.0 | 87.9 | 87.0 | … | ||
| (Annual percentage growth) | |||||||||
| Export volumes | 3.1 | 3.9 | 3.2 | 7.8 | 1.6 | 3.9 | -0.2 | ||
| Import volumes | 7.0 | 2.6 | 4.2 | 7.0 | 13.0 | 13.6 | 6.5 | ||
| Terms of trade | 0.9 | -2.0 | 3.1 | -1.9 | 6.0 | 4.6 | 1.1 | ||
| Real effective exchange rate (1990=100) | … | 122.1 | 103.1 | 119.8 | 129.5 | 138.2 | 139.6 | ||
New Zealand: Key External Vulnerability Statistics
| 1993 | 1998 | 2002 | 2003 | 2004 | 2005 | 2005 | |||
|---|---|---|---|---|---|---|---|---|---|
| Mar. | Mar. | Mar. | Mar. | Mar. | Mar. | Dec. | |||
| (In percent of GDP) | |||||||||
| Current account (annual) | -3.6 | -5.4 | -3.3 | -3.6 | -4.8 | -7.4 | -8.8 | ||
| Net foreign liabilities | 88.3 | 88.0 | 79.5 | 77.4 | 78.6 | 82.7 | 88.6 | ||
| Gross external debt | 78.4 | 84.3 | 113.5 | 109.6 | 107.2 | 111.6 | 107.0 | ||
| Of which: | |||||||||
| Local currency denominated | … | 45.4 | 54.3 | 57.2 | 54.2 | 55.2 | 54.3 | ||
| Short-term (residual maturity) | … | 39.6 | 60.2 | 52.9 | 52.3 | 56.8 | 54.4 | ||
| Official government | … | 20.1 | 16.1 | 13.6 | 13.1 | 11.6 | 11.7 | ||
| Foreign-currency denominated external debt | … | 38.9 | 59.2 | 52.5 | 53.0 | 56.4 | 52.6 | ||
| Share of which hedged (in percent) | … | 94.9 | 94.4 | 89.0 | 87.9 | 87.0 | … | ||
| (Annual percentage growth) | |||||||||
| Export volumes | 3.1 | 3.9 | 3.2 | 7.8 | 1.6 | 3.9 | -0.2 | ||
| Import volumes | 7.0 | 2.6 | 4.2 | 7.0 | 13.0 | 13.6 | 6.5 | ||
| Terms of trade | 0.9 | -2.0 | 3.1 | -1.9 | 6.0 | 4.6 | 1.1 | ||
| Real effective exchange rate (1990=100) | … | 122.1 | 103.1 | 119.8 | 129.5 | 138.2 | 139.6 | ||
2. This chapter looks at New Zealand’s vulnerabilities from two angles. It first evaluates the external position of the country, and then assesses the health and soundness of various sectors of the economy (banks, other lending institutions, corporate sector, and households) by looking at their balance sheets and the key vulnerability indicators.
3. Overall, New Zealand does not appear to face major vulnerabilities, but the household sector has likely become more sensitive to shocks. Foreign currency exposure is small because about half of external debt is denominated in domestic currency and almost 90 percent of the remaining foreign currency debt is hedged. While about half of external debt is short-term, liquidity risks are contained as highly-rated banks are the predominant borrowers, and a substantial share of external loans are from the foreign owners of banks and corporations. Banking and corporate sector balance sheets remain strong and have proven in the past to be resilient to large swings in exchange rates and interest rates. Household balance sheets appear strong in aggregate, but overall debt service burdens are high by historical standards. A significant rise in interest rates or unemployment could strain the finances of those households with high debt service burdens, but stress tests indicate that the financial sector is well-placed to weather such pressures.
B. External Position
4. Net foreign liabilities edged up in 2005, but remain below earlier peaks. Net foreign liabilities increased from 80 percent of GDP at end-March 2003 to 89 percent at end-December 2005, the same level as during most of the 1990s. Gross external debt increased from 83 percent of GDP at end-March 1997 to 115 percent at end-March 2001, and has since declined slightly to 107 percent at end-December 2005 (Table III.6).13 Banks account for a growing proportion of external debt, as their external debt more than doubled from 25 percent of GDP at end-March 1997 to 65 percent at end—March 2005, and they now account for 58 percent of total gross external debt.
5. While about half of external debt is short-term, liquidity risks are contained by a number of factors. In December 2005, 51 percent of external debt was short-term, similar to the average level of the past five years. However, liquidity risks are limited by the financial strength of banks (Section C) and the high share of external debt owed to related parties. As of 2000 (the latest year for which data are available), almost 60 percent of external debt was owed to related parties, primarily the owners of the major banks and foreign-owned corporations.
6. Foreign currency risks are also limited. The foreign currency component of external debt has declined to 49 percent of total debt at end-December 2005, after peaking at 59 percent at end—March 2001. The risks from foreign currency exposure are mitigated by a substantial degree of foreign exchange hedging, according to an official survey covering nearly all foreign currency debt.14 Of the foreign currency debt covered by the March 2005 survey, 87 percent had been hedged through natural hedges or financial derivatives (Table III.7). The market for hedging instruments appears to be reasonably deep and has proven to be rather resilient, given the large swings in the value of the New Zealand dollar over the years.
C. Sectoral Balance Sheets
Banking Sector
7. New Zealand’s banking sector continues to perform strongly. The banking system is concentrated, with four Australian-owned banks holding 85 percent of total assets. The banks are well capitalized, maintaining total capital adequacy ratios above 10 percent, and tier-one capital averaging 8½ percent of risk-weighted assets.15 The asset quality of the banking system has improved over the last five years, with the ratio of impaired assets to total assets decreasing from 0.6 percent in 2001 to 0.2 percent in 2005, well below levels in other developed countries. Efficiency indicators have also improved, with cost-to-income ratio decreasing from 66 percent in the late 1990s to 47 percent in 2005. Banks remained solidly profitable in the year ended March 2005, with an aggregate return on assets of 1.1 percent, even in the face of continued competitive pressure on lending margins. The overall strength of the banks in New Zealand is reflected in their ratings by the independent credit rating agencies; the four largest banks each have credit ratings of AA-.16
8. Some deterioration in bank asset quality can be expected as the economy slows in the near term, but that should not cause stability concerns. Exposure of banks to residential mortgages has increased since 2001, but that should not create problems for stability, due in particular to banks’ conservative lending practices. Banks’ average loan-to-value (LTV) ratios are about 60 percent, and most lending with an LTV ratio over 80 percent is covered by mortgage insurance. Mortgages also have features that forestall foreclosure in case of temporary income reductions or unemployment, reducing risks to collateral values. More recently, banks have begun using new higher-risk lending products, such as “low doc” and “100 percent” loans, but appear to be using these products selectively, and at appropriate interest margin for additional risk.
New Zealand: Banks’ Financial Soundness Indicators
For systemically important banks.
New Zealand: Banks’ Financial Soundness Indicators
| End of March Year | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Assets composition (in share of total) 1/ | ||||||||||
| Financial investments | 16.0 | 17.6 | 16.3 | 17.5 | 22.0 | 19.5 | 18.2 | 16.2 | 16.6 | |
| Residential mortgage loans | 40.1 | 37.1 | 39.6 | 37.6 | 34.7 | 36.2 | 37.2 | 40.9 | 43.2 | |
| Other lending | 37.8 | 36.2 | 37.5 | 37.9 | 36.9 | 38.5 | 38.3 | 36.8 | 34.4 | |
| Other assets | 6.1 | 9.2 | 6.5 | 7.0 | 6.5 | 5.8 | 6.4 | 6.1 | 5.7 | |
| Asset quality | ||||||||||
| Impaired assets (percent of total lending) | 0.69 | 0.59 | 0.52 | 0.42 | 0.57 | 0.39 | 0.32 | 0.16 | 0.17 | |
| Specific provisions (percent of impaired assets) | 36 | 32 | 41 | 38 | 25 | 28 | 34 | 45 | 36 | |
| Profitability indicators (percent, year average) | ||||||||||
| Lending Margin | 2.7 | 2.7 | 2.6 | 2.4 | 2.3 | 2.3 | 2.6 | 2.5 | 2.5 | |
| Return on Average Assets | 1.0 | 0.9 | 1.0 | 1.1 | 1.1 | 1.2 | 1.4 | 1.1 | 1.1 | |
| Capital adequacy ratios | ||||||||||
| Total | 10.3 | 10.5 | 10.6 | 10.3 | 10.6 | 10.9 | 11.5 | 10.4 | 10.8 | |
| Tier one | 6.7 | 7.0 | 7.3 | 7.0 | 7.2 | 7.8 | 8.4 | 7.9 | 8.5 | |
| Efficiency indicators | ||||||||||
| Operating costs to income | 66.4 | 66.1 | 57.3 | 56.9 | 53.9 | 47.3 | 44.4 | 47.4 | 47.3 | |
For systemically important banks.
New Zealand: Banks’ Financial Soundness Indicators
| End of March Year | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |
|---|---|---|---|---|---|---|---|---|---|---|
| Assets composition (in share of total) 1/ | ||||||||||
| Financial investments | 16.0 | 17.6 | 16.3 | 17.5 | 22.0 | 19.5 | 18.2 | 16.2 | 16.6 | |
| Residential mortgage loans | 40.1 | 37.1 | 39.6 | 37.6 | 34.7 | 36.2 | 37.2 | 40.9 | 43.2 | |
| Other lending | 37.8 | 36.2 | 37.5 | 37.9 | 36.9 | 38.5 | 38.3 | 36.8 | 34.4 | |
| Other assets | 6.1 | 9.2 | 6.5 | 7.0 | 6.5 | 5.8 | 6.4 | 6.1 | 5.7 | |
| Asset quality | ||||||||||
| Impaired assets (percent of total lending) | 0.69 | 0.59 | 0.52 | 0.42 | 0.57 | 0.39 | 0.32 | 0.16 | 0.17 | |
| Specific provisions (percent of impaired assets) | 36 | 32 | 41 | 38 | 25 | 28 | 34 | 45 | 36 | |
| Profitability indicators (percent, year average) | ||||||||||
| Lending Margin | 2.7 | 2.7 | 2.6 | 2.4 | 2.3 | 2.3 | 2.6 | 2.5 | 2.5 | |
| Return on Average Assets | 1.0 | 0.9 | 1.0 | 1.1 | 1.1 | 1.2 | 1.4 | 1.1 | 1.1 | |
| Capital adequacy ratios | ||||||||||
| Total | 10.3 | 10.5 | 10.6 | 10.3 | 10.6 | 10.9 | 11.5 | 10.4 | 10.8 | |
| Tier one | 6.7 | 7.0 | 7.3 | 7.0 | 7.2 | 7.8 | 8.4 | 7.9 | 8.5 | |
| Efficiency indicators | ||||||||||
| Operating costs to income | 66.4 | 66.1 | 57.3 | 56.9 | 53.9 | 47.3 | 44.4 | 47.4 | 47.3 | |
For systemically important banks.
Non-bank Lending Institutions
9. Although growing fast, non-bank lending institutions are small, and at the moment do not pose a systemic risk. Deposit taking and lending in New Zealand is done by a number of non-bank institutions, such as building societies, the Public Service Investment Society (PSIS), finance companies, and credit unions. Finance companies and building societies have grown significantly faster than the banks in the last five years, and high exposure of some finance companies to property development lending has become the main potential risk, noted by the November 2005 Financial Stability Report. However, the share of non-bank institutions in the financial system remains small, with total assets equal to 7½ percent of banking system assets, and they have stable profits and low impaired assets. These institutions thus should not present a systemic risk in the near future.
New Zealand: Non-bank Lending Institutions
Data for end-June
New Zealand: Non-bank Lending Institutions
| End of Year | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 1/ | |
|---|---|---|---|---|---|---|---|---|
| Finance companies | ||||||||
| Rate of growth of assets | 11.2 | 23.3 | 29.7 | 20.2 | 19.3 | 19.0 | 18.5 | |
| Return on average assets | … | 1.7 | 1.6 | 2.1 | 2.1 | 2.3 | … | |
| Impaired asset expense to loans and advances | … | 0.5 | 0.8 | 0.8 | 0.8 | 0.8 | … | |
| Building societies and PSIS | ||||||||
| Rate of growth of assets | 9.4 | 9.0 | 11.0 | 13.7 | 14.5 | 13.1 | 13.6 | |
| Return on average assets | … | 0.8 | 0.7 | 0.8 | 0.9 | 0.9 | 0.9 | |
| Impaired asset expense to loans and advances | … | 0.0 | 0.1 | 0.1 | 0.1 | 0.1 | 0.2 | |
Data for end-June
New Zealand: Non-bank Lending Institutions
| End of Year | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 1/ | |
|---|---|---|---|---|---|---|---|---|
| Finance companies | ||||||||
| Rate of growth of assets | 11.2 | 23.3 | 29.7 | 20.2 | 19.3 | 19.0 | 18.5 | |
| Return on average assets | … | 1.7 | 1.6 | 2.1 | 2.1 | 2.3 | … | |
| Impaired asset expense to loans and advances | … | 0.5 | 0.8 | 0.8 | 0.8 | 0.8 | … | |
| Building societies and PSIS | ||||||||
| Rate of growth of assets | 9.4 | 9.0 | 11.0 | 13.7 | 14.5 | 13.1 | 13.6 | |
| Return on average assets | … | 0.8 | 0.7 | 0.8 | 0.9 | 0.9 | 0.9 | |
| Impaired asset expense to loans and advances | … | 0.0 | 0.1 | 0.1 | 0.1 | 0.1 | 0.2 | |
Data for end-June
Corporate Sector
10. Overall financial indicators for the corporate sector in New Zealand remain sound. Rates of return on assets and on equity decreased from their peaks in 2002, but remain at comfortable levels. The corporate sector’s aggregate liquidity is sufficiently high, and interest coverage is healthy. Capitalization is also strong, and leverage ratios remain in line with Australia’s. Nonetheless, interest rates have risen during 2005, and profit margins are declining as a result of rising input costs. Reflecting the overall slowing of the economy, business confidence indicators have been deteriorating. Hence indicators of corporate financial health are expected to decline somewhat, which may lead to a widening of the historically low spreads on corporate paper, but is unlikely to fundamentally affect companies’ liquidity and solvency.
New Zealand: Corporate Sector Indicators
(Aggregate Ratios for Non-Financial Companies, in Percent)
Earnings before interest, taxes and depreciation divided by interest payments
New Zealand: Corporate Sector Indicators
(Aggregate Ratios for Non-Financial Companies, in Percent)
| 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | |
|---|---|---|---|---|---|---|
| Current assets to current liabilities | 127.9 | 115.7 | 119.1 | 124.8 | 130.8 | 131.1 |
| Own Funds to Total Equity and Liabilities | 53.2 | 52.8 | 52.9 | 50.9 | 52.0 | 53.1 |
| Interest coverage ratio 1/ | 3.1 | 3.2 | 3.4 | 5.2 | 4.5 | 4.3 |
| Return on equity | 11.3 | 11.2 | 9.5 | 13.1 | 11.7 | 11.4 |
| Return on assets | 6.0 | 5.9 | 5.0 | 6.7 | 6.1 | 6.0 |
Earnings before interest, taxes and depreciation divided by interest payments
New Zealand: Corporate Sector Indicators
(Aggregate Ratios for Non-Financial Companies, in Percent)
| 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | |
|---|---|---|---|---|---|---|
| Current assets to current liabilities | 127.9 | 115.7 | 119.1 | 124.8 | 130.8 | 131.1 |
| Own Funds to Total Equity and Liabilities | 53.2 | 52.8 | 52.9 | 50.9 | 52.0 | 53.1 |
| Interest coverage ratio 1/ | 3.1 | 3.2 | 3.4 | 5.2 | 4.5 | 4.3 |
| Return on equity | 11.3 | 11.2 | 9.5 | 13.1 | 11.7 | 11.4 |
| Return on assets | 6.0 | 5.9 | 5.0 | 6.7 | 6.1 | 6.0 |
Earnings before interest, taxes and depreciation divided by interest payments
Households
11. Household net worth has increased substantially in recent years, providing a buffer against potential declines in house prices. In 2001-04, household indebtedness rose by 32 percentage points, to 145 percent of disposable income at the end of 2004, a level similar to Australia, the U.K. and the United States.17 At the same time, the value of housing assets increased by 170 percentage points of disposable income, and household gearing has remained relatively stable, with debt around 20 percent of assets. However, with house prices high relative to indicators such as rents, construction costs, and household incomes, there are potential downside risks to house prices in coming years.18 But house prices would need to fall by over one-quarter to reduce household net worth to the end-2001 level.
New Zealand: Household Sector Balance Sheet Indicators
(As of December, in percent of annual disposable income)
Figures refer to year beginning in April, and ending in March of the subsequent year. The household savings data are under review by Statistics New Zealand.
New Zealand: Household Sector Balance Sheet Indicators
(As of December, in percent of annual disposable income)
| 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | ||
|---|---|---|---|---|---|---|---|---|
| Net Wealth | 406 | 411 | 399 | 394 | 424 | 511 | 538 | |
| Total assets | 507 | 519 | 510 | 507 | 547 | 647 | 682 | |
| Financial | 176 | 182 | 180 | 175 | 172 | 177 | 177 | |
| Housing | 331 | 337 | 330 | 332 | 375 | 470 | 505 | |
| Total liabilities | 101 | 108 | 112 | 113 | 123 | 136 | 145 | |
| Housing loans | 83 | 88 | 91 | 92 | 100 | 109 | 117 | |
| Other loans | 18 | 20 | 21 | 21 | 23 | 27 | 28 | |
| Debt/assets, percent | 19.9 | 20.8 | 22.0 | 22.3 | 22.5 | 21.0 | 21.3 | |
| Debt servicing costs | 9.4 | 8.1 | 9.1 | 8.8 | 9.1 | 9.6 | 10.3 | |
| Savings rate 1/ | -4.6 | -1.5 | -4.9 | -4.9 | -11.1 | -12.3 | -12.4 | |
Figures refer to year beginning in April, and ending in March of the subsequent year. The household savings data are under review by Statistics New Zealand.
New Zealand: Household Sector Balance Sheet Indicators
(As of December, in percent of annual disposable income)
| 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | ||
|---|---|---|---|---|---|---|---|---|
| Net Wealth | 406 | 411 | 399 | 394 | 424 | 511 | 538 | |
| Total assets | 507 | 519 | 510 | 507 | 547 | 647 | 682 | |
| Financial | 176 | 182 | 180 | 175 | 172 | 177 | 177 | |
| Housing | 331 | 337 | 330 | 332 | 375 | 470 | 505 | |
| Total liabilities | 101 | 108 | 112 | 113 | 123 | 136 | 145 | |
| Housing loans | 83 | 88 | 91 | 92 | 100 | 109 | 117 | |
| Other loans | 18 | 20 | 21 | 21 | 23 | 27 | 28 | |
| Debt/assets, percent | 19.9 | 20.8 | 22.0 | 22.3 | 22.5 | 21.0 | 21.3 | |
| Debt servicing costs | 9.4 | 8.1 | 9.1 | 8.8 | 9.1 | 9.6 | 10.3 | |
| Savings rate 1/ | -4.6 | -1.5 | -4.9 | -4.9 | -11.1 | -12.3 | -12.4 | |
Figures refer to year beginning in April, and ending in March of the subsequent year. The household savings data are under review by Statistics New Zealand.
12. Many households are exposed to the housing market, and some appear quite vulnerable to higher interest rates. Households’ wealth is heavily concentrated in housing. The share of housing in total households assets increased from 65 percent in 2001 to 74 percent in 2004 (compared to 30-40 percent in the EU), while holdings of equity and other financial assets are quite low by OECD standards. Increased leverage has led to a rise in household interest costs from 8 percent of disposable income in 1999 to 10¼ percent in 2004, and an estimated 12 percent at end-2005. Interest burdens are expected to rise further in 2006 as interest rate increases in 2005 pass into household interest bills. Data from the Household Economic Survey show that only one-third of households have a mortgage, and for those with a mortgage, typical total spending on housing (interest, principal repayments, local authority taxes) is 25 to 30 percent of their disposable income. About one-tenth of borrowers—mostly recent house buyers—have total housing costs exceeding 50 percent of disposable income. The consumption expenditure of such households will be more sensitive to mortgage rates, particularly as they will also likely have more limited scope to draw on their housing equity to cope with any reductions in their incomes. Nonetheless, they represent only 3 to 4 percent of households, and they are most likely (as new buyers) to have fixed rate mortgages, allowing these households some time to adjust in order to remain current on their loans.
Stress Tests
13. The vulnerability of the system as a whole depends on how vulnerabilities in one sector would affect the other sectors of the economy. With the increased exposure to the housing market, the households’ financial position has become riskier over the last few years. Whether this can be seen as a vulnerability for the financial system, however, depends on how an increase in interest rates, a decline in house prices and a subsequent default on some mortgage loans would affect the banking sector. Stress tests of the banking system can be helpful in trying to answer this question.
14. The results of stress tests suggest that, although some households are vulnerable to interest rate increases, this does not present a threat to financial system stability. Partly reflecting banks’ lending conservatism, and the strength of the corporate sector, stress tests from the FSAP concluded in 2004 indicate that banks would be resilient to significant market and credit risk shocks.19 In particular, a stress test scenario with a 20 percent decline in house prices, coupled with a 4 percentage point rise in unemployment and a 4 percent decrease in households’ real disposable income was found to result in a loss of 28 percent of annual bank profits on average, and at most half of annual bank profits in the case of the most affected banks. Given this resilience in the face of a significant slump, the banking system should therefore be able to handle some inevitable deterioration of asset quality during the slowdown without major difficulties.
New Zealand: Decomposition of Gross External Debt 1/
Based on the International Investment Position and the “Overseas Debt Survey” comprising all official organizations known to have external debt, and corporates with external debt greater than $NZ 50 million.
Data not available for 2001 to 2005.
Breakdown unavailable for data published in the IIP of March 2000. Thus, prior to 2001, ratios to total debt from the Overseas Debt Survey of March 2000 are applied to the revised total debt data.
From 2001, short-term maturity data reclassified to include debt maturing in one year.
New Zealand: Decomposition of Gross External Debt 1/
| End-March | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | ||||
| (In percent of GDP) | ||||||||||||
| Total gross external debt | 83.1 | 84.9 | 95.4 | 98.8 | 114.7 | 114.6 | 110.9 | 108.6 | 112.8 | |||
| By sector | ||||||||||||
| Official government | 21.2 | 20.1 | 17.0 | 16.3 | 14.8 | 15.5 | 13.7 | 13.2 | 11.8 | |||
| Corporate sector | 61.8 | 64.9 | 78.4 | 82.5 | 100.0 | 99.1 | 97.2 | 95.4 | 101.0 | |||
| By sub-sector | ||||||||||||
| Banks | 25.2 | 32.7 | 38.5 | 46.9 | 54.3 | 56.1 | 56.0 | 59.4 | 65.4 | |||
| Other corporate | 36.7 | 32.2 | 39.8 | 35.5 | 45.7 | 43.1 | 41.2 | 36.0 | 35.6 | |||
| By relation 2/ | ||||||||||||
| Related party | 31.9 | 43.3 | 44.7 | 51.2 | … | … | … | … | … | |||
| Nonrelated party | 29.9 | 21.6 | 33.6 | 31.3 | … | … | … | … | … | |||
| (In percent of total gross external debt) | ||||||||||||
| Total gross external debt | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| By sector | ||||||||||||
| Official government | 25.6 | 23.6 | 17.8 | 16.5 | 12.9 | 13.5 | 12.4 | 12.2 | 10.4 | |||
| Corporate sector | 74.4 | 76.4 | 82.2 | 83.5 | 87.1 | 86.5 | 87.6 | 87.8 | 89.6 | |||
| By sub-sector | ||||||||||||
| Banks | 30.3 | 38.5 | 40.4 | 47.5 | 47.3 | 48.9 | 50.5 | 54.7 | 58.0 | |||
| Other corporate | 44.1 | 37.9 | 41.7 | 36.0 | 39.8 | 37.6 | 37.1 | 33.1 | 31.6 | |||
| By relation 2/ | ||||||||||||
| Related party | 38.5 | 50.9 | 46.9 | 51.8 | … | … | … | … | … | |||
| Nonrelated party | 36.0 | 25.4 | 35.3 | 31.7 | … | … | … | … | … | |||
| By currency 3/ | ||||||||||||
| New Zealand dollar | 54.7 | 53.5 | 47.2 | 43.3 | 42.0 | 47.9 | 52.1 | 50.5 | 49.5 | |||
| Foreign currency | 45.3 | 46.5 | 52.8 | 56.7 | 59.4 | 55.3 | 47.9 | 49.8 | 50.8 | |||
| U.S. dollar | 25.2 | 28.2 | 32.2 | 35.4 | 38.6 | 34.0 | 33.2 | 32.7 | 28.8 | |||
| Japanese yen | 5.0 | 5.0 | 5.3 | 7.5 | 7.6 | 5.2 | 3.4 | 2.0 | 1.6 | |||
| Australian dollar | 3.8 | 3.8 | 4.2 | 4.7 | 5.8 | 6.4 | 4.9 | 6.3 | 7.3 | |||
| European Euro & UK Pound | 7.2 | 7.0 | 5.8 | 5.4 | 3.7 | 4.4 | 4.5 | 6.3 | 10.9 | |||
| Unallocated | 4.1 | 2.6 | 5.3 | 3.7 | 3.8 | 5.2 | 1.9 | 2.5 | 2.3 | |||
| By (residual) maturity 3/ | ||||||||||||
| Short term (under 1 year) 4/ | 47.3 | 46.7 | 44.7 | 50.5 | 50.4 | 53.1 | 48.3 | 48.8 | 50.9 | |||
| Medium term (1-5 years) | 26.1 | 28.1 | 31.3 | 32.0 | 19.5 | 20.8 | 20.5 | 18.5 | 16.8 | |||
| Long term (over 5 years) | 23.2 | 24.3 | 23.3 | 15.5 | 23.5 | 21.0 | 24.8 | 26.6 | 25.9 | |||
| Unallocated | 3.4 | 0.9 | 0.8 | 2.1 | 6.7 | 5.1 | 6.4 | 6.1 | 6.4 | |||
Based on the International Investment Position and the “Overseas Debt Survey” comprising all official organizations known to have external debt, and corporates with external debt greater than $NZ 50 million.
Data not available for 2001 to 2005.
Breakdown unavailable for data published in the IIP of March 2000. Thus, prior to 2001, ratios to total debt from the Overseas Debt Survey of March 2000 are applied to the revised total debt data.
From 2001, short-term maturity data reclassified to include debt maturing in one year.
New Zealand: Decomposition of Gross External Debt 1/
| End-March | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | ||||
| (In percent of GDP) | ||||||||||||
| Total gross external debt | 83.1 | 84.9 | 95.4 | 98.8 | 114.7 | 114.6 | 110.9 | 108.6 | 112.8 | |||
| By sector | ||||||||||||
| Official government | 21.2 | 20.1 | 17.0 | 16.3 | 14.8 | 15.5 | 13.7 | 13.2 | 11.8 | |||
| Corporate sector | 61.8 | 64.9 | 78.4 | 82.5 | 100.0 | 99.1 | 97.2 | 95.4 | 101.0 | |||
| By sub-sector | ||||||||||||
| Banks | 25.2 | 32.7 | 38.5 | 46.9 | 54.3 | 56.1 | 56.0 | 59.4 | 65.4 | |||
| Other corporate | 36.7 | 32.2 | 39.8 | 35.5 | 45.7 | 43.1 | 41.2 | 36.0 | 35.6 | |||
| By relation 2/ | ||||||||||||
| Related party | 31.9 | 43.3 | 44.7 | 51.2 | … | … | … | … | … | |||
| Nonrelated party | 29.9 | 21.6 | 33.6 | 31.3 | … | … | … | … | … | |||
| (In percent of total gross external debt) | ||||||||||||
| Total gross external debt | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| By sector | ||||||||||||
| Official government | 25.6 | 23.6 | 17.8 | 16.5 | 12.9 | 13.5 | 12.4 | 12.2 | 10.4 | |||
| Corporate sector | 74.4 | 76.4 | 82.2 | 83.5 | 87.1 | 86.5 | 87.6 | 87.8 | 89.6 | |||
| By sub-sector | ||||||||||||
| Banks | 30.3 | 38.5 | 40.4 | 47.5 | 47.3 | 48.9 | 50.5 | 54.7 | 58.0 | |||
| Other corporate | 44.1 | 37.9 | 41.7 | 36.0 | 39.8 | 37.6 | 37.1 | 33.1 | 31.6 | |||
| By relation 2/ | ||||||||||||
| Related party | 38.5 | 50.9 | 46.9 | 51.8 | … | … | … | … | … | |||
| Nonrelated party | 36.0 | 25.4 | 35.3 | 31.7 | … | … | … | … | … | |||
| By currency 3/ | ||||||||||||
| New Zealand dollar | 54.7 | 53.5 | 47.2 | 43.3 | 42.0 | 47.9 | 52.1 | 50.5 | 49.5 | |||
| Foreign currency | 45.3 | 46.5 | 52.8 | 56.7 | 59.4 | 55.3 | 47.9 | 49.8 | 50.8 | |||
| U.S. dollar | 25.2 | 28.2 | 32.2 | 35.4 | 38.6 | 34.0 | 33.2 | 32.7 | 28.8 | |||
| Japanese yen | 5.0 | 5.0 | 5.3 | 7.5 | 7.6 | 5.2 | 3.4 | 2.0 | 1.6 | |||
| Australian dollar | 3.8 | 3.8 | 4.2 | 4.7 | 5.8 | 6.4 | 4.9 | 6.3 | 7.3 | |||
| European Euro & UK Pound | 7.2 | 7.0 | 5.8 | 5.4 | 3.7 | 4.4 | 4.5 | 6.3 | 10.9 | |||
| Unallocated | 4.1 | 2.6 | 5.3 | 3.7 | 3.8 | 5.2 | 1.9 | 2.5 | 2.3 | |||
| By (residual) maturity 3/ | ||||||||||||
| Short term (under 1 year) 4/ | 47.3 | 46.7 | 44.7 | 50.5 | 50.4 | 53.1 | 48.3 | 48.8 | 50.9 | |||
| Medium term (1-5 years) | 26.1 | 28.1 | 31.3 | 32.0 | 19.5 | 20.8 | 20.5 | 18.5 | 16.8 | |||
| Long term (over 5 years) | 23.2 | 24.3 | 23.3 | 15.5 | 23.5 | 21.0 | 24.8 | 26.6 | 25.9 | |||
| Unallocated | 3.4 | 0.9 | 0.8 | 2.1 | 6.7 | 5.1 | 6.4 | 6.1 | 6.4 | |||
Based on the International Investment Position and the “Overseas Debt Survey” comprising all official organizations known to have external debt, and corporates with external debt greater than $NZ 50 million.
Data not available for 2001 to 2005.
Breakdown unavailable for data published in the IIP of March 2000. Thus, prior to 2001, ratios to total debt from the Overseas Debt Survey of March 2000 are applied to the revised total debt data.
From 2001, short-term maturity data reclassified to include debt maturing in one year.
New Zealand: Hedging of Foreign Currency External Debt
(In billions of New Zealand dollars)
Data through 2000 are as published in Total Overseas Debt. From March 2001, FX denominated overseas debt is total debt less $NZ debt less financial derviatives in a net liability position denominated in foreign currencies.
For 2003 - 2005, refers to total FX denominated overseas debt. For previous periods data are FX denominated overseas debt encompassed by the hedging supplement.
New Zealand: Hedging of Foreign Currency External Debt
(In billions of New Zealand dollars)
| End-March | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |||
| Foreign currency external debt 1/ | 43.2 | 48.7 | 57.9 | 69.7 | 68.4 | 62.4 | 67.2 | 78.5 | ||
| Of which: covered by SNZ hedging supplement | 32.4 | 38.0 | 47.0 | 56.5 | 61.9 | 50.9 | 54.9 | 67.9 | ||
| Coverage of supplement (percent) | 75.1 | 78.0 | 81.2 | 81.1 | 90.5 | 81.5 | 81.6 | 86.6 | ||
| Type of hedge 2/ | ||||||||||
| Financial derivatives | 17.6 | 24.5 | 30.6 | 35.4 | 39.5 | 38.4 | 41.8 | 43.6 | ||
| Naturally hedged (against assets/receipts) | 13.2 | 12.4 | 14.8 | 21.0 | 18.9 | 17.2 | 17.3 | 24.7 | ||
| Unhedged | 12.4 | 11.8 | 12.5 | 13.3 | 10.0 | 6.9 | 8.2 | 10.2 | ||
| By sector | ||||||||||
| Banks | 15.9 | 23.8 | 31.9 | 37.7 | 39.7 | 36.8 | 43.3 | 52.7 | ||
| Financial derivatives | 11.6 | 19.3 | 26.0 | 27.3 | 27.4 | 26.1 | 32.3 | 31.9 | ||
| Naturally hedged (against assets/receipts) | 4.3 | 4.4 | 5.3 | 10.4 | … | 9.5 | … | … | ||
| Unhedged | 0.1 | 0.0 | 0.6 | 0.0 | … | 1.2 | … | … | ||
| Corporate and official | 16.5 | 14.2 | 15.0 | 18.8 | 22.2 | 25.7 | 23.9 | 25.8 | ||
| Financial derivatives | 6.0 | 5.2 | 4.6 | 8.1 | 12.1 | 12.3 | 9.5 | 11.7 | ||
| Naturally hedged (against assets/receipts) | 9.0 | 8.0 | 9.5 | 10.6 | … | 7.7 | … | … | ||
| Unhedged | 1.6 | 1.0 | 1.0 | 0.1 | … | 5.7 | … | … | ||
Data through 2000 are as published in Total Overseas Debt. From March 2001, FX denominated overseas debt is total debt less $NZ debt less financial derviatives in a net liability position denominated in foreign currencies.
For 2003 - 2005, refers to total FX denominated overseas debt. For previous periods data are FX denominated overseas debt encompassed by the hedging supplement.
New Zealand: Hedging of Foreign Currency External Debt
(In billions of New Zealand dollars)
| End-March | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | |||
| Foreign currency external debt 1/ | 43.2 | 48.7 | 57.9 | 69.7 | 68.4 | 62.4 | 67.2 | 78.5 | ||
| Of which: covered by SNZ hedging supplement | 32.4 | 38.0 | 47.0 | 56.5 | 61.9 | 50.9 | 54.9 | 67.9 | ||
| Coverage of supplement (percent) | 75.1 | 78.0 | 81.2 | 81.1 | 90.5 | 81.5 | 81.6 | 86.6 | ||
| Type of hedge 2/ | ||||||||||
| Financial derivatives | 17.6 | 24.5 | 30.6 | 35.4 | 39.5 | 38.4 | 41.8 | 43.6 | ||
| Naturally hedged (against assets/receipts) | 13.2 | 12.4 | 14.8 | 21.0 | 18.9 | 17.2 | 17.3 | 24.7 | ||
| Unhedged | 12.4 | 11.8 | 12.5 | 13.3 | 10.0 | 6.9 | 8.2 | 10.2 | ||
| By sector | ||||||||||
| Banks | 15.9 | 23.8 | 31.9 | 37.7 | 39.7 | 36.8 | 43.3 | 52.7 | ||
| Financial derivatives | 11.6 | 19.3 | 26.0 | 27.3 | 27.4 | 26.1 | 32.3 | 31.9 | ||
| Naturally hedged (against assets/receipts) | 4.3 | 4.4 | 5.3 | 10.4 | … | 9.5 | … | … | ||
| Unhedged | 0.1 | 0.0 | 0.6 | 0.0 | … | 1.2 | … | … | ||
| Corporate and official | 16.5 | 14.2 | 15.0 | 18.8 | 22.2 | 25.7 | 23.9 | 25.8 | ||
| Financial derivatives | 6.0 | 5.2 | 4.6 | 8.1 | 12.1 | 12.3 | 9.5 | 11.7 | ||
| Naturally hedged (against assets/receipts) | 9.0 | 8.0 | 9.5 | 10.6 | … | 7.7 | … | … | ||
| Unhedged | 1.6 | 1.0 | 1.0 | 0.1 | … | 5.7 | … | … | ||
Data through 2000 are as published in Total Overseas Debt. From March 2001, FX denominated overseas debt is total debt less $NZ debt less financial derviatives in a net liability position denominated in foreign currencies.
For 2003 - 2005, refers to total FX denominated overseas debt. For previous periods data are FX denominated overseas debt encompassed by the hedging supplement.
Prepared by Dmitriy Rozhkov (Ext. 3-9745).
Data from 2001 are not fully comparable to earlier data due to methodological changes.
Hedging information is collected by Statistics New Zealand from a survey of corporations. In 2005, the survey covered 87 percent of foreign currency debt.
Registered banks in New Zealand are required to maintain a minimum tier-one capital ratio of 4 percent and a total capital ratio of 8 percent of risk-weighted assets.
New Zealand banks are required to have credit ratings independent of their foreign parents.
Preliminary data show that household indebtedness reached 150 percent of disposable income at end-2005.
Reserve Bank of New Zealand, Financial Stability Report, November 2005, provides indicators of housing valuation.
New Zealand: Financial Sector Stability Assessment, IMF Country Report No. 04/126. The stress tests were based on 2003 data, but the authorities’ analysis suggests that the risks to bank capital have not increased substantively since then.
