IMF Executive Board Concludes 2012 Article IV Consultation with New Zealand

Public Information Notice (PIN) No. 12/55
June 7, 2012

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 2012 Article IV Consultation with New Zealand is also available.

On June 6, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with New Zealand and considered, and endorsed, the staff appraisal without a meeting on a lapse-of-time basis.2


The New Zealand economy continues to grow at a modest pace. Output grew by 1 percent in 2011, as elevated export commodity prices and favorable agricultural conditions helped offset the adverse impact of large earthquakes in Canterbury in late 2010 and early 2011. Continued aftershocks have delayed earthquake-related reconstruction. Domestic demand has remained soft as households and businesses continue to deleverage amid a weak housing market and an uncertain outlook. Elevated rates of unemployment, currently above 6 percent, and spare capacity have helped contain inflation.

The Reserve Bank of New Zealand (RBNZ) lowered the policy rate in March 2011 by 50 basis points to cushion the impact of the February earthquake. Since then, it has kept the policy rate on hold given the deterioration in the global economic position, subdued domestic activity, and the expected impact on future domestic activity of the strong exchange rate.

The nominal effective exchange rate has appreciated by around 30 percent since its trough in early 2009. The appreciation reflects the effects of higher export prices, positive interest rate differentials, and, although currently volatile, some increase in global risk appetite since end-2011.

Reflecting the slow recovery, past revenue and spending decisions, and accrued earthquake-related spending, the fiscal deficit in 2010/11 reached a record high of 9¼ percent of GDP on an accrual basis. Net government debt increased to 20 percent of GDP by mid-2011 from a low of 5½ percent in 2008.

The current account deficit in 2011 remained low at 4 percent of GDP, well below the 8 percent level in 2005-08, reflecting terms of trade gains, weak domestic demand, and low world interest rates. Net external liabilities have declined, but remain high at 72 percent of GDP at end-2011.

The banking sector remains sound. Bank profits are strong and nonperforming loans have fallen to less than 2 percent of total loans. Capital adequacy has improved since 2007, with the Tier 1 capital ratio reaching 10 percent in September 2011. Banks have made steady progress in lengthening the maturity profile of their wholesale funding since 2008 and increasing the share of retail deposits, but the total stock of banks’ gross external liabilities remains above 70 percent of GDP and loan-to-deposit ratios remain high.

The pace of New Zealand’s economic recovery is likely to remain modest. Output growth should pick up somewhat to 2⅓ percent in 2012 as earthquake reconstruction spending gains pace, although the size and timing of this spending is still uncertain. Growth is projected to rise to 3¼ percent in 2013, led by reconstruction. The key risks to the outlook are largely on the external front and on the downside, related to emerging weaknesses in the global economy and a possible upheaval in the global financial system.

Executive Board Assessment

In concluding the 2012 Article IV consultation with New Zealand, Executive Directors endorsed staff’s appraisal as follows:

Outlook and risks. The pace of New Zealand’s economic recovery is likely to remain modest. Output growth should pick up somewhat in 2012 as earthquake reconstruction spending is expected to gain pace, but the size and timing of this spending is still uncertain. High household debt is likely to weigh on the growth of private consumption as households will need to save to strengthen their balance sheets. The spare capacity and elevated unemployment will contain wage and inflation pressures in the near term. The risks to this outlook are on the downside and largely external, stemming mainly from emerging weaknesses in the global economy and a possible upheaval in the global financial system. The flexible exchange rate would provide an important buffer against shocks.

Monetary policy. The current accommodative monetary stance is appropriate. If the recovery remains on track and downside risks dissipate, monetary policy will need to tighten gradually to contain inflationary pressures. However, if the global recovery stalls or international capital markets are disrupted, the RBNZ has scope to cut the policy rate and provide liquidity support for banks.

Fiscal policy. The planned deficit reduction path strikes a balance between the need to contain both public and external debt increases while limiting any adverse impact on economic growth during the recovery. The authorities’ plan to return to budget surplus by 2014/15 should put New Zealand in a better position to deal with future shocks and the long-term costs of aging. Moreover, it will relieve pressure on monetary policy and thereby the exchange rate, helping contain the current account deficit over the medium term. New Zealand’s relatively modest public debt gives the authorities some scope to delay their planned deficit reduction path in the event of a sharp deterioration in the economic outlook.

External vulnerabilities and the exchange rate. New Zealand’s large net liabilities present a risk. Despite recent improvements, the current account deficit is projected to increase over the medium term as earthquake reconstruction activity gains pace and global interest rates normalize. To contain this increase and limit a further buildup of foreign liabilities over the longer term, the New Zealand dollar would need to be weaker than its current level. However, part of its current strength may dissipate over time with the eventual tightening of policy rates by major central banks. Increasing national saving, including through the planned fiscal deficit reduction, would reduce external vulnerability.

Financial sector issues. Banks remain sound, but they are exposed to highly leveraged households and farmers and rollover risks associated with large short-term offshore funding needs. While New Zealand’s bank regulatory norms are more conservative than in many other countries, the authorities should assess on an ongoing basis the balance between banking sector vulnerability versus efficiency to minimize the risk that systemically important banks pose to the economy. Options to strengthen prudential norms if needed could include setting banks’ capital requirements above the Basel III minimum or raising the core funding ratio more than the planned 75 percent to reduce short term external debt further. The RBNZ’s continued work on the costs and benefits of macroprudential measures is welcome, as is the authorities’ intention to implement key features of Basel III in early 2013.

New Zealand: Selected Economic and Financial Indicators, 2008–13
Nominal GDP (2011): US$161.9 billion  GDP per capita (2011): US$38,227

Population (2011): 4.4 million

 Quota: SDR 894.6 million
2008 2009 2010 2011 2012 2013
        Proj. Proj.
Real growth (percent change) 1/
GDP (production basis) -0.2 -2.0 1.5 1.1 2.3 3.2
Final domestic demand -0.1 -4.2 2.0 1.4 3.4 5.0
Private consumption 0.0 -1.5 2.3 1.1 2.5 2.4
Government consumption 5.4 0.9 0.5 0.2 1.7 1.5
Fixed investment -3.8 -14.5 2.5 3.2 6.9 14.4
Inventories 2/ 0.9 -3.1 2.6 0.2 -0.4 -0.3
Exports of goods and services -1.3 2.1 3.3 1.1 1.8 2.7
Imports of goods and services 2.8 -14.8 10.5 6.4 3.9 7.2
Output gap -0.3 -3.2 -2.6 -1.8 -1.5 -0.3
Headline CPI inflation (percent change) 4.0 2.1 2.3 4.0 2.1 2.4
End of period (percent change) 3.4 2.0 4.0 1.8 2.6 2.5
Unemployment rate (period average, in percent) 4.2 6.1 6.5 6.5 6.0 5.4
Investment and saving (in percent of GDP)
Investment 23.0 18.9 19.7 19.5 21.4 22.3
National saving 3/ 15.2 16.3 16.2 15.3 15.9 15.9
Public finance (in percent of GDP) 4/
Revenue 37.5 36.9 34.7 36.0 32.7 32.9
Expenditure 34.3 37.1 37.6 43.4 37.6 35.5
Net operating balance 3.8 0.2 -1.8 -6.9 -3.8 -1.7
Net lending (+)/borrowing (–) 3.2 -0.2 -2.8 -7.4 -4.9 -2.6
Operating balance before gains and losses (total Crown) 3.1 -2.1 -3.3 -9.2 -5.4 -1.9
Net core Crown debt excluding NZS Fund and advances 5.6 9.2 14.1 20.0 25.7 27.9
Money and credit (end of period)
Resident M3 (percent change) 5/ 9.1 1.9 3.9 6.7 6.5 ...
Private domestic credit (percent change) 5/ 8.3 1.7 0.5 1.6 1.9 ...
Interest rates (period average)
Interest rate (90-day, in percent) 5/ 8.0 3.0 3.0 2.7 2.8 ...
Government bond yield (10-year, in percent) 5/ 6.1 5.5 5.6 4.6 4.2 ...
Balance of payments (in percent of GDP)
Current account -8.8 -2.6 -3.4 -4.1 -5.4 -6.3
(In billions of New Zealand dollars) -16.3 -4.7 -6.7 -8.3 -11.8 -14.5
Trade balance (goods) -1.3 1.3 1.8 1.7 0.2 -0.5
Terms of trade (percent change) 7.4 -10.1 10.3 4.6 -4.0 1.6
Foreign assets and liabilities ($NZ billion)
Net international investment position -152.6 -151.8 -146.5 -147.0 -158.5 -172.6
(In percent of GDP) -82.7 -81.8 -75.1 -71.9 -72.5 -74.9
Official reserves 5/ 19.1 21.6 21.7 22.1 23.1 ...
Exchange rate (period average)
U.S. dollar per New Zealand dollar 5/ 0.71 0.64 0.72 0.79 0.82 ...
Trade-weighted index (June 1979 = 100) 5/ 65.7 63.5 66.7 69.3 72.5 ...
Nominal effective exchange rate 5/ 6/ 91.1 84.3 92.2 95.1 99.3 ...
Real effective exchange rate 5/ 6/ 92.0 86.7 94.9 98.8 102.0 ...
Sources: Data provided by the New Zealand authorities; and IMF staff estimates and projections.
1/ Data for GDP growth reflect the revisions to the historical GDP figures by Statistics New Zealand in May 2012 to incorporate the new industry classification.
2/ Contribution in percent of GDP.
3/ Based on national accounts data.
4/ Fiscal years ending June 30.
5/ Data for 2012 are for March.
6/ IMF Information Notice System index (2000 = 100).

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.

2 The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.


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