New Zealand: Staff Report for the 2014 Article IV Consultation

This 2014 Article IV Consultation highlights that the economic expansion in New Zealand is becoming increasingly embedded and broad based, with growth exceeding 3 percent in the second half of 2013. The drivers include supportive financial conditions, record high export commodity prices, resurgent construction activity related to the Canterbury post-earthquake rebuild and general housing shortages, and a substantial increase in net immigration. Growth is expected to increase to about 3½ percent in 2014 and moderate to a trend rate of 2½ percent over the medium term. Strong construction activity is expected to remain an important driver for near-term growth.

Abstract

This 2014 Article IV Consultation highlights that the economic expansion in New Zealand is becoming increasingly embedded and broad based, with growth exceeding 3 percent in the second half of 2013. The drivers include supportive financial conditions, record high export commodity prices, resurgent construction activity related to the Canterbury post-earthquake rebuild and general housing shortages, and a substantial increase in net immigration. Growth is expected to increase to about 3½ percent in 2014 and moderate to a trend rate of 2½ percent over the medium term. Strong construction activity is expected to remain an important driver for near-term growth.

Recent Developments

1. Economic developments. The economic expansion is becoming increasingly embedded and broad-based, with growth exceeding 3 percent in the second half of 2013, somewhat stronger than expected. The drivers include supportive financial conditions, record high export commodity prices, resurgent construction activity related to the Canterbury post-earthquake rebuild and general housing shortages, and a substantial increase in net immigration (text figures). Business and consumer confidence indicators have risen to the highest levels since the global financial crisis. The labor market continues to strengthen with the unemployment rate falling to 6 percent (Figure 1). Strong terms of trade have narrowed the 2013 current account deficit to 3¼ percent of GDP and have contributed to the elevated New Zealand dollar, which continues to hold back growth in the non-agricultural tradeable goods sector. With the high exchange rate damping tradable price inflation, headline inflation has remained below the mid-point of the target band (Figure 2). Nominal wage inflation has so far remained subdued.

Figure 1.
Figure 1.
Figure 1.

Growth and Employment

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Sources: Statistics New Zealand; Reserve Bank of New Zealand; ANZ; Haver Analytics; World Economic Outlook; and Fund staff estimates.
Figure 2.
Figure 2.
Figure 2.

A Tightening Monetary Stance

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Sources: Reserve Bank of New Zealand; Statistics New Zealand; New Zealand Institute of Economic Research; Haver Analytics database; and Fund staff estimates.
uA01fig02

Export Commodity Price Index

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Sources: ANZ and Haver Analytics.
uA01fig03

Net Permanent and Long-Term Migration

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Source: SNZ.

2. Monetary policy. After keeping the policy rate at 2½ percent for almost three years, the Reserve Bank of New Zealand (RBNZ) began tightening monetary policy in March 2014 and has raised the policy rate to 3 percent. This makes New Zealand one of the first advanced economies to hike interest rates. The Reserve Bank also indicates that it expects to increase the policy rate steadily over the next two years.

3. Fiscal developments. Supported by healthy output growth the government’s aim of reducing the budget deficit is going according to plan. The deficit is currently projected to decline almost ½ percent of GDOP to less than ½ percent of GDP this year due to restraint in expenditure growth.1 The plan would reduce public debt from its peak of 26 percent of GDP in 2013 to about 20 percent by 2018. The government just concluded selling stakes in state-owned enterprises, which generated proceeds of about 2 percent of GDP.

Outlook and Risks

4. Near-term outlook. Growth is forecast to increase to about 3½ percent this year and moderate to a trend rate of 2½ percent over the medium term. Strong construction activity is expected to remain an important driver for near-term growth (text figure), although the speed of the Canterbury post-earthquake rebuild and its interaction with the wider economy are less certain. The terms of trade are projected to ease somewhat due to an assumed moderation in global dairy prices, but remain high relative to historical levels and continue to boost growth in national income. The current monetary policy stance remains well below neutral, and with leading indicators pointing to an economy that is set to grow above trend in the near-term, pressure on core inflation should follow, particularly from the construction sector (text figure).

uA01fig04

Earthquake-related Investment and Reconstruction

(As share of GDP)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Source: RBNZ estimates.
uA01fig05

Surveyed Capacity Measures

(standardized, seasonally adjusted)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Source: NZIER, RBNZ.

5. External risks. New Zealand’s growth prospects remain exposed to external developments (Box 1). In particular:

  • A sharp growth slowdown in China. About two thirds of New Zealand’s exports of goods—mainly agricultural products—go to China, Australia, and other parts of Asia. A sharp slowdown in China could weaken growth prospects in the region and reduce New Zealand’s terms of trade, which would also have an adverse impact on New Zealand’s national income and overall economic activity. Past declines in commodity prices have usually been accompanied by a weakening of the exchange rate, partially buffering the impact on the economy.

  • Surges in global financial market volatility. An orderly exit by other advanced economies from unconventional monetary policy could have the welcome effect of weakening New Zealand’s exchange rate. However, a bumpy exit and bouts of financial market volatility could lead to widespread contagion and raise the cost of New Zealand banks’ offshore borrowing which, for a given monetary policy stance, could raise household debt servicing costs and impact overall economic activity.

New Zealand: Risk Assessment Matrix1/

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1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

6. Housing sector risks. By historical and international comparisons and some measures of affordability New Zealand’s house prices appear elevated (text figure). This in part reflects a limited housing stock from low housing investment in recent years and geographical constraints preventing a rapid housing supply response.2 With house price inflation running high, there remains the risk that expectations-driven, self-reinforcing demand dynamics and price overshooting could take hold. The government’s steps to help alleviate supply bottlenecks, measures to tighten standards for mortgage lending (paragraph 11), and an increase in mortgage rates should help ease price pressures. But a sudden price correction—possibly triggered by a shock to household incomes or borrowing costs—could reduce consumer confidence, impact overall economic activity, and hurt banks’ balance sheets.

uA01fig06

House Price Inflation

(Annual, 3-month moving average, 2000M1-2014M3)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Sources: REINZ, RBNZ estimates.

7. Tail risks and downside scenarios. Many of the above risks are closely linked—for example a sharp slowdown in China could weaken growth prospects in Australia, triggering a broad-based fall in demand for New Zealand’s exports, and lead to a sudden decline in house, farm and commercial real estate prices. This in turn could weaken consumer demand and negatively affect banks’ balance sheets and their willingness to lend. The downside macroeconomic impact in a scenario where shocks compound each other, while difficult to model, could be large.

8. Policy space to manage risks. The authorities have monetary and fiscal policy space to respond to shocks. The RBNZ has scope to adapt monetary conditions to help buffer against a downside scenario, and the free-floating New Zealand dollar provides an additional cushion against terms of trade and other external shocks. New Zealand’s modest public debt gives the authorities scope to delay their planned deficit reduction path in the event of a sharp deterioration in the economic outlook. The new macro -prudential policy framework improves the RBNZ’s ability to safeguard financial stability, and the bank stands ready to take additional measures if needed to guard against the risks that would arise from an unsustainable acceleration in house price inflation. As a longer term measure, policies to address housing supply constraints will continue to play an important role in containing price pressures and increasing affordability.

9. Authorities’ views. The authorities shared staff’s assessment of the economic outlook and risks. They noted some early signs that recent policy measures to help slow house price inflation are gaining traction, and emphasized that addressing housing supply constraints is key to containing house price pressures and increasing affordability over the longer run. Nevertheless they remain keenly aware of the risks the housing market cycle poses to the financial sector and the economy in the near term. They continue to regard a sharp growth slowdown in China and a related decline in commodity prices as the main external risk to the New Zealand economy, and emphasized the role of the floating exchange rate in providing a cushion against such shocks.

Near-Term Macroeconomic Management

10. Monetary policy stance. Growth is set to exceed trend and other indicators point to a strengthening of the labor market. With inflationary pressures starting to emerge the RBNZ has moved toward a policy of withdrawing monetary stimulus, with the clear signal that it expects to increase rates steadily by nearly 200 basis points by end-2015. This could also help to cool house price inflation. Going forward an effective monetary policy transmission would allow for a nimble policy response should growth circumstances change. More broadly, the integrity and credibility of the RBNZ’s monetary policy framework and the free floating exchange rate will continue to play a key role in delivering macroeconomic stability and enhancing the resilience of the New Zealand economy.

11. Macro-prudential measures. In response to house price inflation and to boost financial sector resilience the RBNZ last year took a number of prudential measures including requirements for banks to hold higher levels of capital against their high loan-to-value (LVR) housing exposure and tight limits on lending above 80 percent LVR threshold (Box 2). The result has been a sharp reduction in high LVR lending (text figure). The RBNZ has made it clear that the LVR restrictions are not intended to be permanent and could be eased or removed once housing market pressures have moderated.3 More generally, the available tools under the new macro-prudential policy framework should be viewed as a complement to macroeconomic and micro-prudential tools, used sparingly and with caution, and primarily with the objective of limiting the buildup of system-wide financial risk.

uA01fig08

Share of New Residential Mortgages at LVRs Greater than 80 Percent

(percent)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

12. Fiscal policy. New Zealand’s fiscal position compares well to its advanced economy peers, but the government considers it a priority to return to budget surplus to preserve its favorable standing with external creditors against the background of relatively high net foreign liabilities, and to build buffers and create fiscal space to cope with future economic shocks and deal with aging and health care cost pressures that are expected to increase over the long term. The government’s deficit reduction plan includes better targeting of social spending where it has identified sizeable inefficiencies and potential for cost savings. The cuts in spending are broad based with a ¾ percent of GDP reduction in health, ¾ percent in social security, ½ percent in education, and nearly ¾ percent in other functions from 2012 to 2016.4 With solid economic growth, revenue is forecast to increase by ¾ percent of GDP in the same period. Deficit reduction would also play a role in supporting monetary policy through the current cycle by making room for increases in private sector and earthquake-related reconstruction spending and thereby allowing for lower interest rates than would otherwise be the case and reducing pressure on the exchange rate. To this end, any revenue over-performance while demand pressure remains strong should be used to pay down government debt rather than being used for higher spending.

13. Authorities’ views. The authorities agreed with staff on the policy actions required—a tightening of monetary conditions, continued deficit reduction to support this, and maintaining macro-prudential measures to cool the housing market. They noted that as spare capacity has largely been exhausted it is important that inflation expectations remain anchored, and the RBNZ’s monetary policy tightening is aimed at keeping future average inflation near the 2 percent target mid-point and ensuring that the economic expansion can be sustained. They agreed that positive budget revenue surprises associated with strong economic growth should be used to pay down debt. They emphasized that while monetary policy and macro-prudential policies are complements, it is essential that each be focused on its primary objective—price stability and financial stability respectively.

New Zealand’s Experience with Macro-Prudential Policies

The banking system performed relatively well during the global financial crisis despite its strong links with volatile international capital markets. It remains sound and well positioned for the on-going recovery with overall credit picking up. Despite this positive outcome, the authorities have moved to tackle existing vulnerabilities that remain from both domestic and external sources. The micro-prudential framework has been incrementally strengthened in line with Basel III standards and a new resolution framework has been added but the RBNZ has also added more innovative macro-prudential policies to its toolkit to strengthen the resilience of the overall financial system to possible shocks.

The macro-prudential policies are aimed at tackling a number of vulnerabilities. On the external side, to reduce the risk from banks’ long standing reliance on potentially volatile foreign funding, the core funding ratio has been progressively raised and specific liquidity ratios have been introduced (text figure). These have had a noticeable impact as shown by the only limited effects of recent volatility in global financial markets on the local banks. A major domestic risk to financial stability has been bank lending to the housing market. The risks are two-fold; (i) that such lending could lead to a price overshooting which if abruptly reversed could damage banks’ balance sheets; and (ii) that in such a situation, banks would need to shore up capital by cutting lending to the real economy and the ensuing credit crunch would have macroeconomic effects that raise non-performing loans.

uA01fig07

Banking System Core Funding

(percent of loans and advances)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Source: RBNZ

The RBNZ has recently introduced requirements for banks to hold a higher level of capital against high loan-to-value ratio (LVR) mortgage lending and tight limits on lending above the 80 percent LVR threshold. There are emerging signs that these policies may be starting to cool the housing market. High LVR lending has fallen from around 25 percent of all mortgage lending in September 2013 to 5.6 percent at the end of March 2014. National house sales dropped 11 percent between October 2013 and March 2014, with the drop in sales volumes evenly spread across regions. The RBNZ also estimates that, in the absence of LVR restrictions, annual house price inflation could have been around 2.5 percentage points higher in the year to March 2014.

New Zealand’s macro-prudential policy framework has several important features:

  • The introduction of macro-prudential policy measures has been on a gradual and incremental basis with full industry consultation. They have also been well targeted and aimed at avoiding distortions. Unlike their use in many Asian economies, they have not been fine tuned in terms of geography or the profile of the purchaser.

  • The measures have been announced as being temporary to be eased when the housing market cools down. This has reduced the incentive for evasion and there are no signs of regulatory arbitrage or increased activity by the non-bank financial sector that could reduce the effectiveness of these measures.

  • These measures reinforce rather than substitute for the existing monetary and exchange rate framework. Monetary policy continues to be the primary tool in managing aggregate demand, while the macro-prudential measures focus on protecting financial stability. The measures do not aim to influence capital inflows or the level of the exchange rate.

External Stability

14. Current account. New Zealand’s persistent current account deficits and relatively high net external liabilities reflect longstanding structural saving-investment imbalances, with low household savings playing a key role (text figure). The reasons for low household savings cannot be fully explained by New Zealand’s observed fundamentals, but might be partly related to less quantifiable factors such as New Zealand’s tax, social security, and welfare systems.5 The deficit narrowed last year as a result of the strong terms of trade, but is expected to widen as growth in private consumption and investment remains strong. Investment related to ongoing earthquake reconstruction will also continue to add to the deficit through the forecast horizon. Reducing pressure on the exchange rate and limiting the current account deficit in a lasting way will require structural measures to address the savings-investment gap, rather than being the task of short-term macroeconomic management. Over the longer term, as reconstruction tapers off and if the exchange rate overvaluation recedes, current account deficit could decline to below 4 percent of GDP, stabilizing the net foreign liability position at below 90 percent of GDP (text figure).6

uA01fig09

Net International Investment Position

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Source: Haver Analytics.
uA01fig10

Long-term Projections for Net Foreign Liabilities and Current Account Deficits

(As percent of GDP)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Source: SNZ; staff estimates.

15. Exchange rate assessment. At 86 cents to the U.S. dollar, our estimates suggest that the exchange rate is 5-15 percent stronger than would be consistent with stabilizing net foreign liabilities over the longer term (Box 3). There are several factors contributing to the current level of the exchange rate including the high terms of trade, the gap between domestic and foreign interest rates, New Zealand’s favorable growth outlook, and an appetite for relatively safe New Zealand assets. If any of these factors were to ease, in part through a faster-than-expected tightening of monetary conditions in other advanced economies, the exchange rate would likely depreciate. The government’s ongoing deficit reduction plan should also ease pressure on the exchange rate by boosting national saving. However, global liquidity could remain ample for some time, and New Zealand’s non-agricultural tradable sector will need to continue to adapt by further increasing efficiency to remain competitive.

A01ufig13

Share of Primary Exports to China

(Annual total, %)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Source: RBNZ

16. Coping with terms of trade shocks. The historically high terms of trade has been one of the key drivers of economic growth recently. Some moderation of the terms of trade is built into the baseline scenarios. Although the share of primary exports to China of New Zealand’s total exports has increased markedly since 2008 (text figure), partly related to New Zealand’s reputation for high quality dairy products relative to Chinese producers, New Zealand is still well integrated into global markets for these products which would buffer shocks that arises from weaker demand in China. The floating exchange rate will also help by depreciating when the terms of trade fall, making other tradable goods and services more competitive. The impact of a faster-than-anticipated decline in the terms of trade on nominal output would affect budget revenue more broadly.

17. Authorities’ views. The authorities agreed that the persistent strength of the New Zealand dollar reflects a combination of structural savings-investment imbalances and the strength of the terms of trade, reinforced at present by the more advanced process of monetary policy normalisation in New Zealand compared to other countries. They recognize the long-standing vulnerability associated with the country’s relatively large net external debt position, and view the planned increase in public savings as the most effective policy action to manage this risk. They emphasized the key role the integrity and credibility of the monetary and fiscal policy framework and the floating exchange rate have played in delivering macroeconomic stability and enhancing the resilience of the New Zealand economy. They agreed that the New Zealand dollar appears overvalued, viewing the current level of the exchange rate as unsustainable in the long run. They expect that the currency’s current strength should dissipate if New Zealand’s export commodity prices moderate and external monetary conditions begin tightening.

Exchange Rate Assessment1/

New Zealand’s real effective exchange rate remained elevated in 2013 driven by historically high prices for commodity exports. The relatively strong dollar continues to weigh on the competitiveness of export and import-competing industries. The current account deficits are projected to widen in the medium term, partly related to the post-earthquake reconstruction investment.

Aside from the structural savings-investment imbalance that contributes to the persistently strong exchange rate, there are a number of short-term factors associated with its current level, including the recovery in global risk appetite and increased portfolio and official flows into New Zealand.

uA01fig11

Exchange Rate and Commodity Price Index

(Monthly, 2000M1-2014M3)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Sources: RBNZ, IMF staff estimates.

Model-based approaches suggest that New Zealand’s real exchange rate is 5-15 percent above the level that would be consistent with medium term fundamentals. The IMF’s amended real effective exchange rate (REER) regression approach attempts to identify the policy-related (both domestic and international) drivers of the deviation of each country’s real exchange rate from its fundamentals-based fitted value. Applied to New Zealand, this yields an estimate of 13 percent overvaluation for 2013. About 9 percent of the overvaluation is due to unexplained residuals, i.e., the exchange rate gap not explained by medium term fundamentals and policy drivers. A similar approach, the current account regression, suggests that New Zealand’s current account deficits are larger than the level consistent with the medium term fundamentals by 1 percent of GDP. Given estimated trade elasticities, this would suggest an overvaluation of about 5 percent. These estimates are, however, subject to considerable uncertainty.

A01ufig12

Equity and Bond Funds Net Inflows

($, million)

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Source: EPFR.

The IMF’s external stability approach suggests that stabilizing net external liabilities in the medium term would require the current account deficit falling to about 3¾ percent of GDP. Given estimated trade elasticities, this would require the New Zealand dollar to be about 11 percent weaker than its current level.

1/ This box is based in part on preliminary results from the IMF’s External Balance Assessment (See http://www.imf.org/external/np/res/eba/data.htm).

Safeguarding Financial Sector Stability

18. Financial developments. New Zealand’s financial system remains sound and analysis shows that New Zealand’s banking sector would be resilient in the face of a severe economic shock.7 The banks are well capitalized—all comfortably meet the new Basel III minimum capital requirement—and liquidity buffers are solid. Non-performing loan ratios are low and declining and recent stress tests indicate that, even under adverse assumptions, they do not pose risks to the healthy capital positions. Banks continue to shift toward more stable funding sources, and use of offshore borrowing has been reduced and is of longer maturity. Nevertheless the banks face longstanding structural issues that will remain sources of financial sector risk over the medium term. The four largest banks are systemically important with broadly similar business models, and their reliance on offshore funding, while declining, is still high by international standards and represents a risk. Residential mortgages and agricultural lending account for most of banks’ assets, sectors vulnerable to price fluctuations and where leverage is still high. Although as subsidiaries the major banks are not dependent on borrowing from their Australian parents, they are still vulnerable should a parent get into trouble which could affect their access to offshore borrowing.

19. Micro and macro prudential measures. The micro-prudential supervisory and regulatory framework has been strengthened since the global financial crisis including through more stringent capital requirements, the introduction of a new bank resolution framework, and measures to promote a greater commitment to New Zealand depositors by foreign owned-banks through mandatory subsidarization. The RBNZ is undertaking another round of stress tests based on robust assumptions that will, for the first time, include the smaller banks. In addition, the RBNZ has enhanced its oversight of the non-bank financial sector that proved to be vulnerable during the previous downturn. The authorities also implemented macro-prudential measures as highlighted in Box 2. The RBNZ will be responsible for applying these measures after consultation with the Minister of Finance. The measures could help dampen credit cycles, strengthen macroeconomic management, and guard against an acceleration of house price inflation.

20. Authorities’ views. The authorities emphasized their conservative approach to bank regulation and supervision. Given this and New Zealand banks’ high quality capital, they did not see a need at present to raise the minimum capital requirements for the four systemically important banks above the Basel III norms. The authorities agreed with staff that the new set of macro-prudential tools should be viewed as a complement to and not substitute for macroeconomic and micro-prudential measures, and should be used sparingly and with caution with the primary objective of maintaining financial system stability.

Staff Appraisal

21. Outlook and risks. The economic expansion is becoming increasingly embedded and broad-based. Headline inflation has remained subdued, but with the economy set to continue to grow above trend in the near term, pressures on core inflation should follow. The key external risk to the outlook remains a sharp slowdown in growth in China, which would affect New Zealand directly through the terms of trade and indirectly through its impact on Australia, a key trading partner. Bouts of financial market volatility could also lead to widespread contagion and raise the cost of New Zealand banks’ offshore borrowing. Domestically, house price inflation remains high and there remains a risk of house price overshooting and accompanying vulnerabilities.

22. Monetary and fiscal policy. Staff welcomes the Reserve Bank’s shift toward a policy of withdrawing monetary stimulus, with the clear signal that rates would be increased further over the next two years. In addition to the longer-term benefits, deficit reduction will play an important role in supporting monetary policy through the current cycle, allowing for lower interest rates than would otherwise be the case and reducing pressure on the exchange rate.

23. External vulnerabilities and the exchange rate. New Zealand’s large net external liabilities, although relatively stable, are a longstanding source of risk and reflect historically low household savings rates. Given a structural savings-investment imbalance, reducing pressure on the exchange rate and limiting current account deficits in a lasting way will require addressing the reasons for low savings, rather than being the task of short-term macroeconomic management. Aside from these structural factors, there are a number of short-term factors contributing to the currently overvalued exchange rate, including historically high terms of trade and an appetite for relatively safe New Zealand assets. If global monetary conditions were to become less stimulatory, the exchange rate would likely depreciate over time, reducing the current account deficit over the medium term.

24. Managing risks. With public debt relatively low and interest rates above the zero bound, the authorities have monetary and fiscal policy space to respond to shocks, and the free-floating New Zealand dollar provides an additional cushion against terms of trade and other external shocks. Restrictions on riskier mortgage lending introduced in October should help reduce the likelihood of an unsustainable acceleration in house price inflation, although it is still too early to assess their full impact. Over the longer term, policies to address housing supply constrains will continue to play an important role in containing price pressures and increasing affordability.

25. Financial sector issues. Banks remain sound, and recent stress tests show that the major banks would be able to withstand a sizeable shock to output, terms of trade, rising unemployment, and a fall in property prices. Nevertheless the banks face longstanding structural issues that will remain sources of risk over the medium term, including reliance on offshore borrowing. The recently introduced macro-prudential policy measures provide additional tools to safeguard financial sector resilience. These tools should be viewed as a complement to macroeconomic and micro-prudential measures. They should be used infrequently, with caution, and with the primary objective of limiting the buildup of system-wide risk.

26. Staff recommends that the next Article IV consultation be held on the standard 12-month cycle.

Figure 3.
Figure 3.
Figure 3.

The Government’s Deficit Reduction Plan

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Sources: The New Zealand Treasury; Statistics New Zealand; World Economic Outlook database; and IMF staff calculations and projections.
Figure 4.
Figure 4.
Figure 4.

Banking Sector Developments

Citation: IMF Staff Country Reports 2014, 158; 10.5089/9781498392143.002.A001

Sources: Reserve Bank of New Zealand, Financial Stability Report; Statistics New Zealand; Bankscope; Reserve Bank of Australia; Haver Analytics database; and IMF staff estimates.
Table 1.

New Zealand: Selected Economic and Financial Indicators, 2009–14

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Sources: Data provided by the New Zealand authorities; and IMF staff estimates and projections.

Contribution in percent of GDP.

Based on national accounts data.

Fiscal years ending June 30.

IMF Information Notice System index (2000 = 100).

Table 2a.

New Zealand: Statement of Operations of Budgetary Central Government, 2009/10-2014/15 1/

(In billions of New Zealand dollars)

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Source: New Zealand Treasury. The data on cyclically adjusted balance, structural balance and structural residual cash balance in this table are based on the IMF’s Staff calculations and methodology.

Fiscal year ending June 30. Includes core Crown (excluding RBNZ) and Crown entities.

Includes use of goods and services.

Includes currency, deposits and equities.

Excluding Reserve Bank Settlement cash.

Excluding NZ Superannuation Fund and advances.

Includes financial assets of NZ Superannuation Fund.

Table 2b.

New Zealand: Statement of Operations of Budgetary Central Government, 2009/10-2014/15 1/

(In percentage of GDP)

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Source: New Zealand Treasury. The data on cyclically adjusted balance, structural balance and structural residual cash balance in this table are based on the IMF’s Staff calculations and methodology.

Fiscal year ending June 30. Includes core Crown (excluding RBNZ) and Crown entities.

Includes use of goods and services.

Includes currency, deposits and equities.

Excluding Reserve Bank Settlement cash.

Excluding NZ Superannuation Fund and advances.

Includes financial assets of NZ Superannuation Fund.

Table 2c.

New Zealand: Central Government Balance Sheet, 2009/10-2014/15

(In billions of New Zealand dollars)

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Source: New Zealand Treasury. The data in this table are based on the IMF’s Staff calculations, methodology, and coverage for the central government.
Table 3.

New Zealand: Balance of Payments and External Debt, 2009-13

(In percent of GDP)

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Sources: Data provided by the New Zealand authorities; and IMF staff estimates and projections.

The large net errors and omissions in 2008 and 2009 mainly reflect financial account data issues, as extreme volatility in exchange rates and market prices during that period made it difficult to separate out valuation effects from financial account transaction.

IIP balance sheet positions arise from transactions and valuation changes. The large net errors and omissions in 2008-09 do not lead to large under-estimation of net foreign liabilities.

Table 4.

New Zealand: Balance of Payments and External Debt, 2009–13

In billions of U.S. dollars)

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Sources: Data provided by the New Zealand authorities; and IMF staff estimates and projections.

The large net errors and omissions in 2008 and 2009 mainly reflect financial account data issues, as extreme volatility in exchange rates and market prices during that period made it difficult to separate out valuation effects from financial account transaction.

IIP balance sheet positions arise from transactions and valuation changes. The large net errors and omissions in 2008-09 do not lead to large under-estimation of net foreign liabilities.

Table 5.

New Zealand: Medium-Term Scenario, 2013–19

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Sources: Data provided by the New Zealand authorities; and IMF staff estimates and projections.

Contribution in percent of GDP.

Converted from March year basis for historical data. Public saving covers general government.

Fiscal years ending June 30.

Data for end-December.