IMF Executive Board Concludes 2009 Article IV Consultation with New Zealand

Public Information Notice (PIN) No. 09/57
May 14, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with New Zealand is also available.

On May 6, 2009 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with New Zealand.1


After several years of strong growth, the New Zealand economy entered a recession in early 2008. The long-anticipated cooling of domestic demand was initially triggered by the end of the housing boom and a severe drought, and later exacerbated by the global slowdown. Real GDP contracted in all quarters of 2008. CPI inflation has eased since peaking in September 2008, driven by weak economic activity and a sharp decline in oil prices. The labor market remained relatively resilient, but also started to weaken in late 2008, with unemployment rising to 4.6 percent.

As the economy contracted and inflation pressures eased, monetary policy was loosened and the exchange rate depreciated significantly. The official cash rate (OCR) was cut by a total of 575 basis points since July 2008, to 2½ percent. The fiscal position remained strong, but the outlook has weakened considerably. The budget balance is projected to reach a deficit of 1½ percent of GDP in 2008/09 (July-June), compared to a surplus of 3 percent of GDP in 2007/08.

The trade balance deteriorated, widening the current account deficit further to about 9 percent of GDP in 2008. Private capital inflows continued to finance the deficit, and net foreign liabilities increased to 94 percent of GDP.

The banking sector remains sound. However, banks’ significant exposure to short-term external wholesale funding and housing loans makes them vulnerable to rollover risk and a sharp increase in mortgage default rates.

The near-term outlook is weak, and the uncertainty regarding the economy’s prospects is higher than usual, due to the unprecedented uncertainties surrounding the depth and duration of the global recession. On balance, staff expects the economy to contract by about 2 percent in 2009.

Executive Board Assessment

Executive Directors noted that, following a decade of strong growth, during which significant imbalances and vulnerabilities accumulated, the New Zealand economy slipped into recession in early 2008. As the housing boom ended in response to tight monetary policy, the downturn was exacerbated by the global economic crisis and the near-term outlook is challenging. Directors commended the New Zealand authorities for their policy response, which will help support domestic demand in the short run and enhance financial stability. Moreover, the authorities’ strong track record of sound and transparent macroeconomic policies and structural reforms has allowed New Zealand to enter the downturn from a position of strength.

Directors noted that the significant fiscal stimulus underway will help cushion the near-term impact of the downturn. The combined effect of the stimulus and the weaker outlook for commodity prices and growth is, however, resulting in a significant deterioration of the medium-term fiscal outlook. Given New Zealand’s considerable short-term external debt and large current account deficit, a rapid increase in public debt could lead to a higher country risk premium, which would reduce the benefits from the macroeconomic stimulus. Directors therefore welcomed the authorities’ commitment to limit the increase in public debt, and to present in the upcoming 2009 budget a credible strategy to reduce the fiscal deficit over the medium term. In this context, they noted that steps are already being taken to eliminate existing unfunded commitments and to stop the growth of employment in government administration. Directors encouraged the authorities to make contingency plans, given the unprecedented uncertainties in the global economic environment.

Directors considered that the significant easing of monetary policy since July 2008 has been appropriate. Lower policy rates have been largely passed on to lending rates, stimulating demand and gradually providing relief to existing borrowers. Directors observed that, in light of the weak outlook for growth and inflation, further easing may be warranted, but should proceed cautiously. Directors concurred that the inflation targeting regime has served New Zealand well providing a strong anchor for inflation expectations. Directors noted that the monetary easing, together with the fall in international commodity prices, has also led to a significant depreciation of the exchange rate. The exchange rate is now broadly in line with fundamentals, and the depreciation should help narrow the current account deficit.

Directors noted that the financial sector has remained resilient in the global crisis, buttressed by sound prudential policies. They commended the authorities for taking timely measures to strengthen confidence and support bank access to funding, including through the introduction of funding guarantees and the expansion of the Reserve Bank’s liquidity facilities and acceptable collateral instruments. Noting that banks remain highly exposed to short-term external debt and to an increase in mortgage defaults, Directors welcomed the authorities’ commitment to closely monitor the financial system, and called for extreme stress tests for banks and increased bank capital if needed. The proposed prudential liquidity rules for the banking system should help reduce banks’ reliance on short-term external funding. Directors commended the ongoing collaboration with the Australian authorities on banking supervision, regulation, and crisis preparedness.

New Zealand: Selected Economic Indicators



        Proj. Proj.


2005 2006 2007 2008 2009 2010

Real economy (percent change)


GDP (production basis)

2.8 1.9 3.2 0.3 -2.0 0.5

Final domestic demand

4.4 2.3 4.2 -0.2 -3.2 -1.3

Exports of goods and services

-0.3 1.8 3.8 -1.7 -5.0 2.9

Imports of goods and services

5.5 -2.6 8.4 2.6 -10.3 -2.6

Headline CPI inflation (end of period)

3.2 2.7 3.2 3.4 0.8 1.3

Unemployment rate (in percent)

3.7 3.8 3.6 4.1 6.5 7.5

National saving (in percent of GDP) 1/

16.5 14.9 15.8 14.3 12.0 13.1

Investment (in percent of GDP)

24.9 23.6 24.0 23.2 19.8 20.2

Government budget (in percent of GDP) 2/



33.5 35.8 34.4 34.5 33.3 32.4


29.4 31.0 31.8 31.9 35.4 37.5

Operating balance before gains and losses

4.7 4.6 3.7 3.0 -1.4 -4.2

Net Crown debt including NZS Fund

3.0 -1.1 -4.4 -7.3 -4.5 -0.2

Money and credit (end of period)


M3, resident (change in percent)

9.4 11.3 11.1 10.1 8.9 ...

Private domestic credit (change in percent)

10.2 12.4 12.8 7.3 6.0 ...

Interest rates (period average)


Interest rate (90-day, in percent) 3/

7.1 7.5 8.3 8.0 3.7 ...

Government bond yield (10-year, in percent) 3/

5.9 5.8 6.3 6.1 4.6 ...

Balance of payments (in percent of GDP)


Current account balance

-8.5 -8.7 -8.2 -8.9 -7.8 -7.0

Trade balance (goods)

-2.4 -1.9 -1.3 -1.3 -1.2 -0.7

Terms of trade (change in percent)

1.1 0.0 6.0 7.4 -7.3 -4.3

External assets and liabilities (in percent of GDP)


Official reserves ($NZ billion) 4/

13.1 19.9 22.3 19.3 24.5 ...

Gross external debt

106.7 115.5 123.1 137.4 148.3 153.9

Net international investment position

-84.3 -87.1 -87.1 -93.8 -106.1 -113.0

Exchange rate (period average)


US$/$NZ 5/

0.7 0.6 0.7 0.7 0.5 ...

Trade-weighted index (June 1979 = 100) 5/

70.4 65.4 70.9 65.7 53.8 ...

Nominal effective exchange rate 6/

134.3 123.8 133.0 124.1 97.5 ...

Real effective exchange rate 6/

137.6 128.1 137.7 129.3 104.4 ...

Sources: Data provided by the New Zealand authorities; and IMF staff estimates and projections.
1/ Based on national accounts data.
2/ Fiscal years ending June 30.
3/ Data for 2009 are as of end-March.
4/ Data for 2009 are as of end-January.
5/ Data for 2009 are for January-March.
6/ IMF Information Notice System index (2000 = 100). Data for 2009 are for January.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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