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### Context and macroeconomic backdrop
- Australia’s economic performance has been robust relative to other advanced economies despite the commodity price and mining investment bust.
- Growth remained above 2 percent (annual rate); uninterrupted expansion without a recession has continued for 25 years.
- Factors mitigating shocks:
  - Prompt monetary easing.
  - Flexible exchange rate acting as a shock absorber.
  - Export orientation to the dynamic Asia region.
  - Relatively high labor force and population growth.
  - Flexible labor markets.
  - Relatively small size of the commodity sector and continued strong mining export performance.
- Post-GFC slowdown: average GDP growth about 0.8 percent lower (annual rate) relative to pre-GFC, indicative of lower potential output growth.
- Key macro-financial concerns:
  - Housing-related and external macro-financial vulnerabilities.
  - Real house prices and household debt ratios rose to high levels during 1990s–2000s boom and picked up again recently.
  - Large housing exposure (over 50 percent of total assets) of Australia’s highly concentrated banking system.
  - Long-running current account deficits and a relatively large net external liability position.
  - Funding risks for Australian banks due to reliance on international wholesale markets.

### Recent developments (past year)
- Growth and demand
  - Growth (annual rates) increased to over 3 percent from mid-2015—above potential output growth estimate of 2¾ percent—driven by higher government spending, LNG export capacity coming on stream, strong services export growth, and buoyant residential investment.
  - Private business investment outside mining remained subdued.
  - Real GDP unexpectedly contracted by 2 percent annualized in 2016Q3 when one-off level effects wore off; temporary, weather-related weakness in residential investment also contributed.
- Labor market
  - Unemployment fell from its recent peak, but the fall likely overstates labor market improvement.
  - Underemployment rate has remained almost 2 percentage points above average (7 percent of the active labor force over the past 20 years).
  - Some 80 percent of the jobs created over the past year or so have been part-time jobs.
  - IMF Staff mid-2016 estimates: output gap at 1.7 percent and unemployment rate gap at 0.5 percent (about 1¼ percent at the peak).
- Inflation and monetary policy
  - Both headline and core inflation were below the inflation target range of 2-3 percent in 2016.
  - Core inflation stabilized at around 1.6 percent after RBA policy rate cuts.
  - RBA lowered the policy rate by another 50 basis points to 1.5 percent in 2016 in May and August.
  - Nominal unit labor costs running at less than 0.5 percent on average.
- External position and exchange rate
  - Current account balance remained moderately weaker than its fundamental level; the Australian dollar continued to be moderately overvalued.
  - Currency depreciation in 2014-15 reduced much of prior overvaluation, but correction stalled in recent months.
  - Yields on longer-term Australian bonds declined; bond price increases together with exchange rate appreciation contributed to a marked deterioration in the net external liability position over the past year.
  - Underlying external risk profile improved: share of longer-term external funding of Australian banks increased while short-term external funding decreased.
- Housing and household sector
  - Real house price gains moderated; sales volumes and turnover moderated; strongest price increases in Sydney and Melbourne.
  - Standard valuation metrics suggest somewhat higher house price overvaluation relative to the 2015 Article IV assessment.
  - APRA prudential guidance (introduced late 2014) tightened lending standards and curtailed growth in riskier mortgage loans and household credit.
  - Mortgage buffers rose to some 18 percent of outstanding mortgage loans by mid-2016—the equivalent of around 2½ years of scheduled debt payments at current interest rates.
  - Household debt ratio rose to 186 percent of gross disposable income over the past year.
  - Household leverage stable at around 25 percent (liabilities as a percent of net worth).
  - Heterogeneity: around 25 percent of all households in each income quintile had debt to income ratios above 3 in FY2013-14.
  - Residential investment rose to some 0.5 percent of GDP above its long-term average; an above-average number of new apartments expected to come on stream, mainly in downtown Brisbane, Melbourne, and to a lesser extent Sydney.
- Banking sector and financial conditions
  - Large Australian banks raised CET1 capital ratio from 8.6 of RWA in June 2014 to 10 percent at end-2015; ratios expected to improve further in 2016.
  - After adjustments for stricter requirements, capital ratios place the banks at the low end of the top quartile internationally (APRA studies).
  - Bank funding conditions improved; foreign currency funding continues to be fully hedged.
  - Nonperforming loans largely unchanged; NPL ratio of loans to the agricultural sector from New Zealand subsidiaries around 1 percent; exposure to the agricultural sector about 1½ percent of banks’ consolidated assets.

### Outlook and baseline projections
- Growth
  - Growth expected to be close to trend, with increasing contributions from domestic demand as adjustment to commodity and mining shocks advances.
  - With the 2016Q3 contraction largely due to one-off factors, growth expected to resume in the last quarter of 2016.
  - Residential investment growth expected to rebound given a strong pipeline of building approvals and housing starts.
  - Private business investment contribution should turn positive as mining investment correction runs its course and non-mining investment picks up.
  - States with rapid activity growth expected to ramp up infrastructure spending in 2017-18.
  - Export growth expected to slow somewhat as initial boosts from new mining capacity and tourism moderate.
- Inflation
  - The disinflation experienced in 2015-16 expected to start reversing.
  - Rebound of oil prices in 2016 has dissipated an important source of disinflation.
  - Output gap projected to decline; inflation effects from downward pressure on producer price levels due to increased retail competition should wear off absent major new entrants.
- Macro-financial vulnerabilities
  - Housing-related vulnerabilities expected to stabilize gradually due to realignment of house price inflation with broader measures of inflation and robust growth, increased residential supply over next two years, and lower affordability constraining demand.
  - Credit gaps and debt ratios should stabilize or decline.
  - Accumulation of net external liabilities should slow in absence of valuation effects.
  - As banks prepare to meet net stable funding ratio requirements by 2018, related vulnerabilities should improve further.

### Balance of risks
- Overall: balance of risks has improved but remains tilted to the downside.
- Upside possibility:
  - Persistent improvement in terms of trade could boost business confidence and commodity production.
- Downside possibilities:
  - Consumption growth could remain lackluster with continued low wage growth and high part-time work incidence.
  - Profits could remain under pressure for longer with increased competition and persistent slack.
  - External risks: rising populism and nationalism in large economies; tighter and more volatile global financial conditions.
  - A sharper growth slowdown in China could hit commodity prices and exports and could interact with domestic risks, especially triggering a sharp housing market correction.
- Housing-external linkages:
  - Annual approvals for all non-residents applying to purchase residential property have substantially increased to around 20 percent of overall turnover value.
  - External shocks could lead to external funding pressure for banks.

### Policy priorities and staff recommendations
- Three broad objectives:
  - Completing the economy’s transition to non-mining growth.
  - Containing macro-financial vulnerabilities.
  - Enhancing longer-term growth potential.
- Monetary policy
  - The RBA’s stance should remain accommodative until the return of inflation to the mid-point of the target range is highly secured.
  - Given gradual decline in slack and downside risks, policy should reflect possibility that return of inflation may take longer.
  - RBA could consider enhancing policy communication: lengthening the forecast horizon in its Statements on Monetary Policy and providing more clarity on the policy rate path, possibly through publication of the RBA’s projected policy rate path.
- Fiscal policy
  - Government should use fiscal space for gradual fiscal consolidation and structural fiscal reform.
  - Conditions for pro-active fiscal stimulus (policy rates at the effective lower bound and impaired monetary policy transmission) are not present now.
  - Contingency planning: if downside risks materialize, fiscal stimulus may be needed; contingency plans should include a revolving pipeline of ready-to-implement infrastructure projects with coordination between Commonwealth and State governments.
  - Structural fiscal reform priorities:
    - Increased efficient infrastructure spending: capital spending expected to increase by ½ of a percentage point of GDP in the current budget year but projected to level off; a sustained multi-year increase at Commonwealth level is desirable.
    - Strengthen reforms supporting innovation and productivity: upgrade of the R&D tax credits and active labor market policies.
    - Tax shift: lowering corporate and household income taxes while increasing the goods and services tax (GST) could boost investment and lift GDP. IMF G20MOD background work: long-term multiplier for a 1 percent of GDP shift from corporate income taxes to the GST is roughly 0.6 percent of GDP; that of labor income taxes to the GST is over 0.1 percent of GDP.
  - Fiscal framework: staff suggest considering a long-term debt anchor instead of the current medium-term budget balance anchor; implement over a 5- to 10-year horizon.
- Macro‑financial policies
  - Continue APRA guidance aimed at tighter lending standards to contain growth in riskier mortgage lending.
  - APRA should stand ready with targeted prudential measures if lending or house price growth re-accelerate.
  - Prepare banks for net stable funding ratio requirements by 2018 to reduce funding vulnerabilities.
  - Encourage banks to anchor capital position in “unquestionably strong” territory; consider pillar 2 adjustments and higher minimum risk weights for higher-risk housing-related loans.
- Housing supply and household balance sheets
  - Monitor pipeline of new apartments to address potential temporary oversupply in downtown areas.
  - Address heterogeneity in household balance sheets, with attention to first-time buyers and new borrowers with high debt ratios and small buffers.
- External and funding risks
  - Monitor valuation effects on the net external liability position and reliance on international wholesale funding.
  - Encourage longer-term external funding and further reductions in short-term external funding reliance.

### Developments in commercial real estate (Box 1)
- CRE valuation trends
  - Commercial real estate (CRE) prices in Australia have increased rapidly since mid-2014.
  - Rents have not followed at the same pace; the price-to-rent (PR) ratio is now above average and deviations are close to levels last seen before the global financial crisis.
  - Internationally, Australia’s CRE PR ratio is closer to the pre-crisis maximum than in almost all other countries for which data are available, except the United States and Canada.
  - Valuation increases may partly reflect strong interest of foreign investors in Australian CRE assets.
- Financial stability implications
  - The share of CRE lending in commercial banks’ total assets decreased in the past few years and has now stabilized at around 5 percent.
  - Banks’ lending growth to CRE has been rising recently, with an increased contribution by Australian branches of foreign banks.
  - The share of impaired CRE assets over total CRE assets has declined and the impaired assets are almost fully provisioned.
  - While a downturn in the CRE market would likely not pose a major financial stability risk, it may still have important macroeconomic effects as Australia’s CRE capital expenditures as a percent of GDP are relatively high in comparison.

### CRE lending and balance‑sheet indicators (2006–2016, APRA data summary)
- CRE lending growth (yoy, %): series shown by bank type (Major Banks, Other Domestic Banks, Foreign Subsidiary, Foreign Branch).
- Share of CRE in banks' balance sheets: stabilized at around 5 percent of banks' total assets.
- Impaired CRE assets and provisions: share of impaired CRE asset to banks' CRE lending has declined; specific provisions and security held to impaired CRE assets are near full provisioning.
- Cross‑country comparison: Australia’s CRE-related capital expenditure as a percent of GDP is relatively high among listed comparators.

### China downside scenario with policy responses (Box 2)
- Downside scenario overview
  - China growth surprises on the downside, producing significant spillovers and a sizable impact on commodity prices.
  - At the trough relative to the baseline:
    - The effective foreign output gap is 2.3 percentage points lower.
    - Metal prices are 5.3 percent lower.
- Monetary policy-only case (anticipatory response)
  - Policy rate declines to the effective lower bound, assumed to be 0.75 percent.
  - Policy rate stays at the effective lower bound for 2 years.
  - Result: further depreciation in the Australian dollar helps support the economy, but a sizable negative output gap remains; headline inflation slightly overshoots the 2.5 percent mid-point of the RBA’s 2-3 percent inflation target range.
- Combined monetary-fiscal policy response
  - Direct fiscal stimulus equal to 0.25 percent of GDP for 2017-18.
  - Monetary policy cut aggressively to its lower bound faster than under monetary-only case.
  - Outcome: inflation modestly overshoots above the upper bound of the 2-3 percent target range over the medium term; faster closing of the output gap; monetary policy can renormalize earlier than under the monetary-only case.
- Key quantitative assumptions
  - Effective foreign output gap shock at trough: 2.3 percentage points lower.
  - Metal prices at trough: 5.3 percent lower.
  - Effective lower bound on policy rate: 0.75 percent.
  - Duration at lower bound in monetary-only case: 2 years.
  - Direct fiscal stimulus size (combined case): 0.25 percent of GDP for 2017-18.
  - RBA inflation target range: 2-3 percent (mid-point 2.5 percent).

### Fiscal, external, and debt sustainability highlights
- Fiscal space and outlook
  - Australia has substantial fiscal space; gross debt is still low at 40 percent of GDP compared with other major advanced economies.
  - Federal government aimed for substantial near-term fiscal consolidation but budget targets have not been met because of weaker nominal income; fiscal stance in 2016 estimated to be broadly neutral.
  - FY2016/17 budget projected a return to fiscal balance by FY2020/21 and renewed commitment to a federal government surplus of 1 percent of GDP over the business cycle, implying a cumulative adjustment of up to 3.4 percent of GDP.
  - Mid-Year Economic and Fiscal Outlook 2016-17 (MYEFO) foresees a cumulative adjustment of the fiscal balance of 2.1 percent of GDP by end of FY2019/20.
- External assessment and REER
  - REER depreciated 7 percent in 2015 relative to 2014 average; as of June 2016, REER depreciated by less than ½ percent compared to 2015 averages.
  - Compared to its thirty-year average, the REER is some 14 percent higher.
  - Staff assesses the REER to be 0 to15 percent above the level implied by medium-term fundamentals and desirable policy settings.
- External debt and public debt projections (selected values)
  - External debt baseline shown at 129 (percent of GDP) with shocks varying to 131–133 in scenarios.
  - Nominal gross public debt projections (selected): 18.0 (2014), 34.2 (2015), 37.6 (2016), 40.9 (2017), 43.2 (2018).
  - Real GDP growth projections (percent): 2.8 (2014), 2.8 (2015), 2.4 (2016), 2.3 (2017), 2.6 (2018), 3.0 (2019).
  - Baseline public DSA projections (2016–2021): Real GDP growth 2.3 (2016), 2.6 (2017), 3.0 (2018), 3.0 (2019), 2.9 (2020), 2.9 (2021); Inflation 1.0 (2016), 1.6 (2017), 1.5 (2018), 2.3 (2019), 2.4 (2020), 2.4 (2021); Primary Balance -1.9 (2016), -1.7 (2017), -0.8 (2018), 0.2 (2019), 0.9 (2020), 1.0 (2021).

### Structural reforms, productivity and innovation
- Productivity trends and challenges
  - Aggregate labor productivity growth averaged around 1.5 percent annually over the past decade and a half; more recently growth has slowed with weaker multifactor productivity, especially in services.
  - Weak non-mining investment has likely resulted in less capital deepening.
- Policy measures
  - National Innovation and Science Agenda (NISA) allocates $1.1 billion (less than 0.1 percent of GDP) over four years to boost innovation and entrepreneurship in the high-tech sector, including through tax breaks.
  - Harper Review recommendations aim to boost competition and productivity in services sectors; many measures require state-level implementation.
  - Trade liberalization, active labor market policies, and social safety net adjustments emphasized.
  - Government’s $840 million Youth Employment Package targets increased employability of youth mainly through wage subsidies.

### Staff appraisal summary and recommended agenda
- Staff view: robust growth and low unemployment during adjustment to the commodity price and mining investment bust but weak wage and price pressures and lackluster private business investment outside mining persist.
- Recommended three priorities:
  - Demand support to ensure completion of the transition to non-mining-based growth (monetary accommodation; use of fiscal space for gradual consolidation and growth-friendly composition).
  - Further reductions in macro-financial vulnerabilities (strengthen bank capital and funding resilience; APRA readiness to act).
  - Reforms to enhance longer-term growth potential (infrastructure, innovation, tax shifts, competition).
- Specific recommendations:
  - Maintain accommodative monetary policy stance.
  - Use fiscal space to pursue gradual budget repair and reorient expenditure towards growth-enhancing measures; prepare contingency stimulus plans and infrastructure project pipelines.
  - APRA to stand ready to intensify targeted prudential measures and to encourage banks to reach “unquestionably strong” capital positions.
  - Continue Treasury work to implement FSI recommendations, including loss absorbing capacity and leverage ratio introduction.

*International Monetary Fund — Australia: Developments in Australia’s Commercial Real Estate Market (chapter content).*

### 1. Developments in Australia’s Commercial Real Estate Market __________________________________ 22

### 1. Developments in Australia’s Commercial Real Estate Market __________________________________ 22

### Context
- Australia’s economic performance has been robust relative to other advanced economies despite the commodity price and mining investment bust.
- Growth has remained above 2 percent (annual rate).
- Australia’s uninterrupted expansion without a recession has continued for 25 years.
- Factors mitigating shocks:
  - Prompt monetary easing.
  - Flexible exchange rate acting as a shock absorber.
  - Export orientation to the dynamic Asia region.
  - Relatively high labor force and population growth.
  - Flexible labor markets.
  - Relatively small size of the commodity sector and continued strong mining export performance (Annex I: “Four Years After the Bust ...”).
- Post-GFC slowdown: average GDP growth about 0.8 percent lower (annual rate) relative to pre-GFC, indicative of lower potential output growth.
- Key concerns:
  - Housing-related and external macro-financial vulnerabilities.
  - Real house prices and household debt ratios rose to high levels during 1990s–2000s boom and picked up again recently.
  - Large housing exposure (over 50 percent of total assets) of Australia’s highly concentrated banking system.
  - Long-running current account deficits and a relatively large net external liability position.
  - Funding risks for Australian banks due to reliance on international wholesale markets.

### Recent Developments (over the past year)
- Growth and demand
  - Growth (at annual rates) increased to over 3 percent from mid-2015—above current potential output growth estimates of 2¾ percent—driven by:
    - Higher government spending.
    - LNG export capacity coming on stream.
    - Strong services export growth.
    - Buoyant residential investment.
  - Private business investment outside mining remained subdued.
  - Real GDP unexpectedly contracted by 2 percent annualized in 2016Q3 when one-off level effects wore off; temporary, weather-related weakness in residential investment also contributed.
- Labor market
  - Unemployment fell from its recent peak, but the fall likely overstates labor market improvement.
  - Underemployment rate has remained almost 2 percentage points above average (7 percent of the active labor force over the past 20 years).
  - Some 80 percent of the jobs created over the past year or so have been part-time jobs.
  - IMF Staff estimates as of mid-2016: output gap at 1.7 percent and unemployment rate gap at 0.5 percent (about 1¼ percent at the peak).
- Inflation and monetary policy
  - Both headline and core inflation were below the inflation target range of 2-3 percent in 2016.
  - Core inflation stabilized at around 1.6 percent after RBA policy rate cuts.
  - RBA lowered the policy rate by another 50 basis points to 1.5 percent in 2016 in May and August.
  - Nominal unit labor costs running at less than 0.5 percent on average.
- External position and exchange rate
  - Current account balance remained moderately weaker than its fundamental level; the Australian dollar continued to be moderately overvalued.
  - Currency depreciation in 2014-15 reduced much of prior overvaluation, but correction stalled in recent months.
  - Yields on longer-term Australian bonds declined, and bond price increases together with exchange rate appreciation contributed to a marked deterioration in the net external liability position over the past year.
  - Underlying external risk profile improved: share of longer-term external funding of Australian banks increased while short-term external funding decreased.
- Housing and household sector
  - Real house price gains moderated; sales volumes and turnover moderated; strongest price increases in Sydney and Melbourne.
  - Standard valuation metrics suggest somewhat higher house price overvaluation relative to the 2015 Article IV assessment.
  - APRA prudential guidance (introduced late 2014) tightened lending standards and curtailed growth in riskier mortgage loans and household credit.
  - Mortgage buffers rose to some 18 percent of outstanding mortgage loans by mid-2016—the equivalent of around 2½ years of scheduled debt payments at current interest rates.
  - Household debt ratio rose to 186 percent of gross disposable income over the past year.
  - Household leverage (liabilities as a percent of net worth) stable at around 25 percent.
  - Heterogeneity: around 25 percent of all households in each income quintile had debt to income ratios above 3 in FY2013-14.
  - Residential investment rose to some 0.5 percent of GDP above its long-term average; an above-average number of new apartments expected to come on stream, mainly in downtown Brisbane, Melbourne, and to a lesser extent Sydney.
  - Leading indicators (approvals of new houses and dwellings, new residential construction starts) have started to level off after brisk increases in 2014-15.
  - In commercial real estate, property price valuations have increased but remain within the usual range of variation over the cycle (Box 1).
- Banking sector and financial conditions
  - Large Australian banks raised CET1 capital ratio from 8.6 of RWA in June 2014 to 10 percent at end-2015; ratios expected to improve further in 2016.
  - After adjustments for stricter requirements, capital ratios place the banks at the low end of the top quartile internationally (APRA studies).
  - Bank funding conditions improved; foreign currency funding continues to be fully hedged.
  - Nonperforming loans (NPL) largely unchanged; NPL ratio of loans to the agricultural sector from New Zealand subsidiaries around 1 percent; exposure to the agricultural sector about 1½ percent of banks’ consolidated assets.

### Outlook
- Baseline expectations
  - Growth expected to be close to trend, with increasing contributions from domestic demand as adjustment to commodity and mining shocks advances.
  - With the 2016Q3 contraction largely due to one-off factors, growth expected to resume in the last quarter of 2016.
  - Residential investment growth expected to rebound given a strong pipeline of building approvals and housing starts.
  - Private business investment contribution should turn positive as mining investment correction runs its course and non-mining investment picks up.
  - States with rapid activity growth expected to ramp up infrastructure spending in 2017-18.
  - Private consumption should strengthen as recovery and labor markets improve.
  - Export growth expected to slow somewhat as initial boosts from new mining capacity and tourism moderate.
- Inflation
  - The disinflation experienced in 2015-16 expected to start reversing.
  - Rebound of oil prices in 2016 has dissipated an important source of disinflation.
  - Output gap projected to decline; inflation effects from downward pressure on producer price levels due to increased retail competition should wear off absent major new entrants.
- Macro-financial vulnerabilities
  - Housing-related vulnerabilities expected to stabilize gradually.
  - Drivers: realignment of house price inflation with broader measures of inflation and robust growth; increased residential supply over next two years; lower affordability constraining demand.
  - Credit gaps and debt ratios should stabilize or decline.
  - Accumulation of net external liabilities should slow in absence of valuation effects.
  - As banks prepare to meet net stable funding ratio requirements by 2018, related vulnerabilities should improve further.

### Key statistics and indicators (selected from the chapter)
- Growth rates and gaps:
  - Growth remained above 2 percent (annual rate).
  - Growth increased to over 3 percent from mid-2015.
  - Potential output growth estimate: 2¾ percent.
  - Post-GFC average GDP growth decline: about 0.8 percent (annual rate).
  - Real GDP contracted by 2 percent annualized in 2016Q3.
  - IMF Staff mid-2016 output gap: 1.7 percent.
  - IMF Staff mid-2016 unemployment rate gap: 0.5 percent (about 1¼ percent at the peak).
- Inflation and monetary policy:
  - Inflation target range: 2-3 percent.
  - Core inflation stabilized at around 1.6 percent.
  - RBA policy rate lowered by 50 basis points to 1.5 percent in May and August 2016.
  - Nominal unit labor costs running at less than 0.5 percent on average.
- Housing and household finances:
  - Household debt ratio: 186 percent of gross disposable income.
  - Mortgage buffers: some 18 percent of outstanding mortgage loans (~2½ years of scheduled payments at current interest rates).
  - Household leverage: around 25 percent (liabilities as percent of net worth).
  - Fraction of households with debt-to-income ratios above 3 in FY2013-14: around 25 percent in each income quintile.
  - Residential investment: some 0.5 percent of GDP above its long-term average.
  - New apartment supply concentrated in downtown Brisbane, Melbourne, and to a lesser extent Sydney.
- Banking sector:
  - CET1 capital ratio of major banks: 8.6 of RWA in June 2014 → 10 percent at end-2015 (expected to improve further in 2016).
  - NPL ratio for agricultural loans from New Zealand subsidiaries: around 1 percent.
  - Agricultural sector exposure: some 1½ percent of banks’ consolidated assets.
- Labor market:
  - Underemployment rate: about 7 percent of active labor force (almost 2 percentage points above average over past 20 years).
  - Share of jobs created that were part-time: some 80 percent.

### Policy implications and focus areas (implied by analysis)
- Maintain prompt and flexible monetary policy to support rebalancing and a return of inflation toward 2-3 percent.
- Prudential measures and monitoring:
  - Continue APRA guidance aimed at tighter lending standards to contain growth in riskier mortgage lending.
  - Prepare banks for net stable funding ratio requirements by 2018 to reduce funding vulnerabilities.
- Housing supply and demand management:
  - Monitor pipeline of new apartments to address potential temporary oversupply in downtown areas.
  - Address heterogeneity in household balance sheets, with particular attention to first-time buyers and new borrowers with high debt ratios and small buffers.
- External and funding risks:
  - Monitor valuation effects on the net external liability position and the reliance on international wholesale funding.
  - Encourage longer-term external funding and further reductions in short-term external funding reliance.

*International Monetary Fund — Australia: Developments in Australia’s Commercial Real Estate Market (chapter content).*

### 12.      The balance of risks has improved but is still to the downside. The interaction of external

### The balance of risks has improved but is still to the downside.

### Balance of risks and outlook
- The interaction of external and domestic downside risks must remain the main policy concern.
- Upside possibility: recent terms-of-trade improvements could boost business confidence and commodity production if they are more persistent than expected.
- Downside possibilities:
  - Consumption growth could remain lackluster with continued low wage growth and high incidence of part-time work.
  - Profits could remain under pressure for longer with increased competition and relatively persistent slack.
  - External risks to global trade from rising populism and nationalism in large economies and from tighter and more volatile global financial conditions.
  - A sharper growth slowdown in China could hit both traditionally exposed sectors (commodity prices and exports) and new sources of growth (e.g., services exports) and interact with or trigger domestic risks, especially a sharp housing market correction.
- Housing market and external-financial linkages:
  - Annual approvals for all non-residents applying to purchase residential property have substantially increased to around 20 percent of overall turnover value.
  - External shocks could lead to external funding pressure for banks.

### The Authorities’ views on outlook and risks
- Authorities’ assessment:
  - The transition to non-mining-based growth after the boom was well advanced.
  - Some elements of the “new mediocre” (including weak private business investment) were present but seen as reflecting adjustment to the decline in the terms of trade and the large fall in mining investment rather than as causes.
  - Many new jobs were part-time, partly reflecting labor force preferences; rise in underemployment and long-term and youth unemployment remained small in historical comparison; growth in output had remained close to trend.
  - Trend growth decline was small, about a quarter of a percentage point, partly reflecting lower population growth.
- Outlook as expressed by authorities:
  - Robust broad-based growth expected to continue.
  - Near-term supports: household consumption; another wave of LNG capacity ramp-up in 2017 and 2018; rising public investment as States’ infrastructure spending increases; residential dwelling investment growth moderating but remaining strong in the near term; private business investment no longer detracting from growth in 2018 as mining drag eases and non-mining investment rises moderately.
  - GDP growth would strengthen to around trend rates; economy expected to return to full employment gradually, with underemployment declining and inflation moving back into the target range.
  - Balance of risks had improved but remained tilted to the downside, with the possibility of a hard landing in China being a key medium-term concern.
- Views on household leverage and housing risks:
  - Risks associated with high and rising household leverage had diminished due to tighter bank lending standards encouraged by prudential measures, slower mortgage credit growth, improved risk profiles for new loans, and moderation in housing price growth.
  - Short-term demand-supply mismatches in housing markets were localized.
  - Some risks related to lending to real estate developers were being closely monitored.
  - Households across all income brackets continue to accumulate deposits in offset accounts, implying that effective household debt was lower, and did not use mortgage borrowing to finance consumption.
  - More resilient bank balance sheets contributed to diminished housing risks.

### Economic policy priorities
- Three broad objectives:
  - Completing the economy’s transition to non-mining growth.
  - Containing macro-financial vulnerabilities.
  - Enhancing longer-term growth potential.

A. Supporting Aggregate Demand
- Context and recent policy actions:
  - Transition to non-mining-based growth has advanced significantly with monetary policy support but is not completed; lack of significant price and wage pressures suggests some economic slack remains.
  - The RBA cut the policy rate promptly in early 2016 in response to an unexpected downshift in expected inflation.
  - Staff background work suggests the equilibrium real interest rate declined from about 3 percent in the early 1990s to close to 1 percent in the second quarter of 2016 compared to an actual real rate of 0.2 percent, although there is substantial uncertainty around such estimates.
  - Absent monetary easing, upward pressure on the Australian dollar would likely have been stronger, reinforcing the disinflationary impulse.
- Fiscal position and space:
  - Australia has substantial fiscal space; standard metrics suggest fiscal space under both the baseline and economic stress scenarios (Annex VI—External and Fiscal Debt Sustainability Analysis).
  - Sovereign spreads over U.S. bonds have been relatively moderate in the past 12 months (at most 64 basis points).
  - Gross debt is still low at 40 percent of GDP compared with other major advanced economies.
  - Federal government aimed for substantial near-term fiscal consolidation but budget targets have not been met because of weaker nominal income; automatic stabilizers operated and the fiscal stance in 2016 is estimated to have been broadly neutral.
  - In the FY2016/17 budget, the government projected a return to fiscal balance by FY2020/21 and renewed commitment to a federal government surplus of 1 percent of GDP over the business cycle as a medium-term fiscal anchor, implying a cumulative adjustment of up to 3.4 percent of GDP.
  - The Mid-Year Economic and Fiscal Outlook 2016-17 (MYEFO), released on December 19, 2016, foresees a cumulative adjustment of the fiscal balance of 2.1 percent of GDP by end of FY2019/20, as revenues strengthen primarily related to stronger personal income tax collection because of bracket creep.
- Staff recommendations on monetary and fiscal policy:
  - Monetary policy:
    - The RBA’s stance should remain accommodative until the return of inflation to the mid-point of the target range is highly secured.
    - Given gradual decline in slack and downside risks, policy should reflect possibility that return of inflation may take longer.
    - RBA could consider enhancing policy communication: lengthening the forecast horizon in its Statements on Monetary Policy and providing more clarity on the policy rate path, possibly through publication of the RBA’s projected policy rate path.
  - Fiscal policy:
    - The government should use its fiscal space for gradual fiscal consolidation and structural fiscal reform.
    - Conditions for pro-active fiscal stimulus (policy rates at the effective lower bound and impaired monetary policy transmission) are not present now.
    - Some fiscal consolidation is desirable given a sizeable structural budget deficit and impending medium-term increases in ageing-related spending, but Australia has space to undertake budget repair gradually.
    - Any remaining negative demand effects could be offset by continuing accommodative monetary policy, expenditure switching, and growth-friendly structural fiscal reform.
    - Contingency planning: should downside risks materialize, fiscal stimulus may be needed; contingency plans should include a revolving pipeline of ready-to-implement infrastructure projects with coordination between Commonwealth and State governments.
  - Structural fiscal reform priorities:
    - Increased spending on infrastructure: capital spending is expected to increase by ½ of a percentage point of GDP in the current budget year, but projected to level off and decline thereafter; a sustained multi-year increase in efficient infrastructure spending at the Commonwealth level would be desirable.
    - Strengthen reforms supporting innovation and productivity: upgrade of the R&D tax credits and active labor market policies to lower risks of hysteresis and support human capital formation.
    - Tax shift: lowering corporate and household income taxes while increasing the goods and services tax (GST) could boost investment and lift GDP.
      - Background work using IMF’s G20MOD suggests the long-term multipliers for a 1 percent of GDP shift from corporate income taxes to the GST is roughly 0.6 percent of GDP, while that of labor income taxes to the GST is over 0.1 percent of GDP; a revenue-neutral tax shift should lead to a permanent increase in the level of real GDP.
  - Fiscal framework:
    - IMF staff review suggests authorities consider changing to a long-term debt anchor instead of the current medium-term budget balance anchor; implemented over a 5- to 10-year horizon the debt anchor would remain flexible enough to allow countercyclical support.

B. Managing Macro-Financial Vulnerabilities
- Context and recent developments:
  - Momentum in house prices and housing credit has moderated; bank balance sheets have strengthened with prudential and regulatory steps, but vulnerabilities have not yet decreased materially.
  - APRA’s escalation of supervisory intensity and guidance on lending standards has contributed to lowering growth in new, higher risk lending (e.g., LTV > 80 percent), while housing market conditions cooled broadly.
  - Risks of renewed price acceleration remain because mortgage and interest rates are still low and foreign investment interest in residential property in major cities remains strong.
  - High household debt could still amplify the negative impact of large shocks.
- Regulatory changes and buffers:
  - Under Basel III:
    - As of January 2016, banks had to meet a capital conservation buffer of 2.5 percent of RWA.
    - A buffer for domestic systemically important institutions of 1 percent of RWA became effective.
    - The counter-cyclical capital buffer is currently set at zero.
  - In July 2016, a floor for mortgage risk weights for banks using the IRB approach took effect.
  - Tighter prudential rules do not seem to have led to migration of credit activity to non-banks; the shadow banking sector in Australia has remained relatively small over recent years.

*AUSTRALIA  INTERNATIONAL MONETARY FUND*

### 32.      With signs of a cooling housing market, the tightening of prudential measures should

### 32.      With signs of a cooling housing market, the tightening of prudential measures should 

### Housing market and prudential stance
- Under the IMF staff’s macro-financial baseline outlook, tighter loan restrictions could accelerate a cooling in housing market, which would be pro-cyclical.
- In markets where a house price correction has already begun—in the mining states, for example—they risk delaying the recovery from the commodity bust, including by hindering labor mobility.
- With continued upside risks to house prices and housing lending growth, APRA should stand ready with targeted prudential measures.
- Minimum amortization requirements for new loans could also be considered to rein interest-only lending further.
- Policy timing caveat: APRA indicated that final standards on an “unquestionably strong” capital ratio would not be released soon, with 2017 being a year of consultation, and standards unlikely to take effect until at least a year after that to facilitate an orderly build-up of capital.

### Banks’ capital position and prudential options
- Banks should further strengthen their capital position to increase resilience to housing and other macro-financial shocks.
- Options discussed:
  - Adjustments to the level of required capital dependent on banks’ exposure to risky housing market segments and lending standards in those segments (pillar 2 adjustments).
  - Introduce higher minimum risk weights for some lending, notably higher-risk housing-related loans.
- Rationale: Focus on strengthening banks’ ability to absorb losses from a more significant housing market correction and ensure banks can continue to generate sufficient internal capital to finance balance sheet growth and maintain unquestionably strong capital ratios.

### Longer-term structural and tax measures
- The Commonwealth tax system provides households with incentives for leveraged real estate investment that likely amplifies housing cycles.
- Incentives arise from the combination of tax concessions on capital gains and the possibility to apply losses from negative gearing to income from other sources.
- Reform caveat: Reforms of capital gain tax concessions would need to be undertaken in a broader context, to avoid introducing new distortions in the taxation of different assets.

### Regulatory reform agenda and financial sector resilience
- Broader progress in implementing the regulatory reform agenda would help lower and manage financial sector risks.
- APRA’s effort to develop an operational framework to assess whether Australian banks are “unquestionable strong” in international comparison will further reduce bank-related financial stability risks.
- Priorities from the 2014 Financial Sector Inquiry include:
  - Implementation of a framework for loss absorbing and recapitalization capacity.
  - Introduction of a leverage ratio, in the context of international regulatory developments.
- Treasury: continues efforts to introduce new legislation to deliver on the Government’s financial system agenda and the 48 measures responding to the Financial System Inquiry (FSI) recommendations.

### AML/CFT, remittances, and regional correspondent banking
- The Financial Action Task Force’s 2015 Mutual Evaluation Report found the real estate sector is exposed to significant money laundering risk and should be subject to AML/CFT safeguards in line with international standards.
- In response:
  - Australia completed a statutory review of its AML/CFT regime and initiated a consultation process about regulating real estate professionals under the AML/CFT Act.
  - The cost-benefit analysis of different regulatory models is expected to be completed by July 2017.
- Remittance flows from Australia have remained broadly stable while regional correspondent banking relationships with Australian banks have continued.
  - AUSTRAC’s tracking suggests no significant change in patterns or magnitudes of remittance flows.
  - Some money transfer operators have had bank accounts closed, affecting only a subset, and have faced increased costs and complexities.
- Authorities’ mitigating actions:
  - Formed a high-level interdepartmental committee to coordinate policies.
  - Intensified consultation with the industry.
  - Provided neighboring countries with technical assistance to deal with AML/CFT challenges.
  - Actively engaged in the G20 Global Partnership for Financial Inclusion.

### Productivity growth, reforms, and innovation
- Recent performance and challenges:
  - Aggregate labor productivity growth in Australia has remained stable over the past decade and a half, increasing at an annual average rate of around 1.5 percent.
  - More recently, labor productivity growth has slowed, with weaker multifactor productivity especially in the services sectors.
  - Weak non-mining investment has likely resulted in less capital deepening.
- Government and policy responses:
  - National Innovation and Science Agenda (NISA) allocates $1.1 billion (less than 0.1 percent of GDP) over four years to boost innovation and entrepreneurship in the high-tech sector, including through tax breaks.
  - The government plans to continue and expand the program if it proves effective.
  - The Harper Review identified reforms to boost competition and productivity in services sectors; many measures require state-level implementation and intergovernmental coordination.
  - Trade liberalization and increased access to service export markets are emphasized; active labor market policies and the social safety net should mitigate adjustment costs.
- Labour market notes:
  - Flexible labor market settings have contributed to a smooth adjustment from the mining boom with low unemployment.
  - Elevated underemployment and persistent youth unemployment are concerns.
  - The government’s $840 million Youth Employment Package seeks to increase employability of youth mainly through wage subsidies.

### Staff appraisal, outlook, and policy priorities
- Context and recent performance:
  - Australia experienced robust growth and low unemployment during adjustment to the commodity price and mining investment bust, but faced weak wage and price pressures and lackluster private business investment outside mining.
- Outlook and risks:
  - After a growth pickup from mid-2015, real GDP unexpectedly contracted in 2016Q3, largely on account of one-off factors; growth close to trend is expected to resume.
  - Balance of risks to the growth outlook improved in 2016 but remains tilted to the downside; a major concern is that high-impact external risks could interact with or trigger domestic risks, especially a housing correction.
- Macro-financial developments:
  - APRA’s prudential measures introduced in late 2014 improved the risk profile of new loans.
  - Household debt has remained high, but risks have been mitigated by strong growth in mortgage buffers.
  - Banks’ balance sheets have become more resilient with higher capital ratios and a higher share of stable funding.
- Recommended policy agenda (three priorities):
  - Demand support to ensure completion of the transition to non-mining-based growth.
  - Further reductions in macro-financial vulnerabilities.
  - Reforms to enhance longer-term growth potential.
- Specific staff recommendations:
  - Monetary policy stance should remain accommodative.
  - Fiscal: Australia still has substantial fiscal space; government plans to balance the budget over four years while making expenditure composition more growth-friendly.
  - Fiscal risks:
    - The envisaged fiscal consolidation risks being too front-loaded: over the next two years, the budget targets reductions in the structural budget deficit of close to 1½ percent.
    - A more sustained public investment effort is desirable; a multi-year increase in spending on efficient infrastructure beyond the planned current short-lived increase would be desirable.
  - If high-impact downside risks materialize, fiscal policy should support aggregate demand; developing contingency plans and a pipeline of infrastructure projects would help reduce implementation lags.
  - Macro-financial actions:
    - With continued upside risks to house prices, APRA should stand ready to intensify targeted prudential measures if lending or house price growth were to re-accelerate.
    - APRA should continue to actively encourage banks to anchor capital position in “unquestionably strong” territory.
    - Treasury’s preparation of new legislation to further the regulatory reform agenda should continue to complete implementation of FSI recommendations, including steps to strengthen loss absorbing and recapitalization capacity and introduce leverage ratios.

### Developments in Australia’s Commercial Real Estate (Box 1)
- CRE valuation trends:
  - Commercial real estate (CRE) prices in Australia have increased rapidly since mid-2014.
  - Rents have not followed at the same pace, and the price-to-rent (PR) ratio is now above average.
  - Deviations from average are now close to levels last seen before the global financial crisis.
  - Internationally, Australia’s CRE PR ratio is closer to the pre-crisis maximum than in almost all other countries for which data are available, with the notable exception of the United States and Canada.
  - Valuation increases may in part reflect strong interest of foreign investors in Australian CRE assets.
- Financial stability implications:
  - The share of CRE lending in commercial banks’ total assets decreased in the past few years and has now stabilized at around 5 percent.
  - Banks’ lending growth to CRE has been rising recently, with increased contribution by Australian branches of foreign banks.
  - The share of impaired CRE assets over total CRE assets has declined and the impaired assets are almost fully provisioned.
  - While a downturn in the CRE market would likely not pose a major financial stability risk, it may still have important macroeconomic effects as Australia’s CRE capital expenditures as a percent of GDP are relatively high in comparison.

*AUSTRALIA — INTERNATIONAL MONETARY FUND (staff appraisal excerpt).*

### Box 1. Developments in Australia’s Commercial Real Estate Market (concluded)

### Box 1. Developments in Australia’s Commercial Real Estate Market (concluded)

### CRE lending growth (yoy, %)
- Chart timeframe: 2006–2016.
- Series shown by bank type: Major Banks, Other Domestic Banks, Foreign Subsidiary, Foreign Branch.
- Variable plotted: CRE Lending Growth Rate (yoy, %).
- Data source: APRA.

### Share of CRE in banks' balance sheets
- Chart timeframe: 2006–2016.
- Variable plotted: Share of CRE (% of Banks' Total Asset).
- Vertical axis scale shown from 0 to 8 (percent).
- Data source: APRA.

### Impaired CRE assets and provisions
- Chart timeframe: 2006–2016.
- Variables plotted:
  - Share of impaired CRE asset to banks' CRE lending (left axis, scale 0–7).
  - Specific provisions and security held to impaired CRE assets (right-hand side axis, scale 0–7).
- Chart title: Impaired CRE Assets and Special Provisions (%).
- Data source: APRA.

### Cross‑country comparison: CRE-related capital expenditure
- Variable plotted: Share of CRE Related Capital Expenditure (% of GDP).
- Countries shown (labels visible): Australia, Canada, Ireland, Japan, New Zealand, UK, USA.
- Vertical axis scale shown from 0.0 to 4.0 (percent).
- Data sources: MSCI; Haver Analytics; and IMF staff calculations.

_Source: APRA; MSCI; Haver Analytics; and IMF staff calculations (as presented in Box 1. Developments in Australia’s Commercial Real Estate Market (concluded))._

### Box 2. A China Downside Scenario with Monetary and Fiscal Policy Responses

### Box 2. A China Downside Scenario with Monetary and Fiscal Policy Responses

### Downside scenario overview
- China growth surprises on the downside, producing significant spillovers to the rest of the world and a sizable impact on commodity prices.
- The scenario implies an opening up of the effective foreign output gap relevant for the Australian economy (defined as export-weighted output gaps for Australia’s main trading partners).
- At the trough relative to the baseline:
  - The effective foreign output gap is 2.3 percentage points lower.
  - Metal prices are 5.3 percent lower.

### Monetary policy-only case (anticipatory response)
- In anticipation of negative shocks, the policy rate declines to the effective lower bound, assumed to be 0.75 percent.
- The policy rate stays at the effective lower bound for 2 years.
- The policy-rate action results in a further depreciation in the Australian dollar that helps support the economy.
- Despite the depreciation and monetary easing, a sizable negative output gap remains because it is largely dominated by the magnitude of the negative shock.
- Headline inflation slightly overshoots the 2.5 percent mid-point of the RBA’s 2-3 percent inflation target range.

### Combined monetary-fiscal policy response
- A direct fiscal stimulus is used to help deal with the negative external shocks hitting the Australian economy.
- The direct effects of the fiscal stimulus are equal to 0.25 percent of GDP for 2017-18.
- Monetary policy provides a supporting role:
  - The policy rate is cut aggressively to its lower bound faster than under the monetary-policy-only case.
  - This more aggressive monetary easing helps raise inflation and generate a modest overshoot of inflation above the upper bound of the 2-3 percent target range over the medium term.
- Mechanisms and outcomes:
  - The planned overshoot of inflation raises inflation expectations and reduces real interest rates.
  - Combined with a more depreciated exchange rate, these effects help close the output gap much faster.
  - A faster recovery under this more accommodative strategy allows monetary policy to renormalize earlier than under the monetary-policy-only case.

### Key quantitative values and assumptions
- Effective foreign output gap shock at trough: 2.3 percentage points lower (vs baseline).
- Metal prices at trough: 5.3 percent lower (vs baseline).
- Effective lower bound on policy rate: 0.75 percent.
- Duration at lower bound in monetary-only case: 2 years.
- Direct fiscal stimulus size (combined case): 0.25 percent of GDP for 2017-18.
- RBA inflation target range: 2-3 percent (mid-point 2.5 percent).

*International Monetary Fund.*

### Annex I. Four Years after the Bust....

### Annex I. Four Years after the Bust....

### Overview
- The sizeable bust in commodity prices and rapid decline in mining investment has been weathered well by the Australian economy.
- Over the boom period:
  - Mining investment rose from its average of around 2 percent of GDP to over 9 percent by 2013.
  - Net terms of trade doubled.
  - Resource exports rose from 6 percent of GDP to 11 percent.
  - The value added share of the broadly defined “resource sector” (directly extractive industries and support industries) rose from 4¼ percent over 1990-2004 to 14¼ percent in 2011/12.
  - The share of the resource sector in employment doubled from around 5 percent over 1990-2004 to just under 10 percent in 2011/12, mostly among support industries; the employment share of the mining sector itself remained around 2 percent.

### Value added and employment dynamics
- Peak and composition:
  - Resource sector value added peaked at 15.5 percent of GDP in 2013/14, about half (8 percent of GDP) was value addition within the mining sector itself.
  - Remaining value addition in 2013/14: 4 percent of GDP due to mining exports, and 3¼ percent of GDP due to investment.
- Contribution by sector (Table 1: Value Added in Resource Sector, % GDP, 2013/14):
  - Resource sector total: 15.5%
    - Due to mining exports: 11.6%
    - Due to mining investment: 3.9%
  - Mining: Total 8.0%
    - Mining exports: 7.5%
    - Mining investment: 0.6%
  - Other industries: Total 7.4%
    - Mining exports: 4.1%
    - Mining investment: 3.3%
  - Business services: Total 2.6%
    - Mining exports: 1.8%
    - Mining investment: 0.9%
  - Construction: Total 1.6%
    - Mining exports: 0.3%
    - Mining investment: 1.3%
  - Manufacturing: Total 1.2%
    - Mining exports: 0.6%
    - Mining investment: 0.5%
  - Transport: Total 0.5%
    - Mining exports: 0.4%
    - Mining investment: 0.2%
  - Other industries (aggregated): Total 1.6%
    - Mining exports: 1.1%
    - Mining investment: 0.5%
- Employment:
  - Resource sector employment peaked in 2013/14 at 10 percent of total employment; of this, only 2 percent was in direct mining activity and the rest in support sectors.
  - By 2015/16, resource employment declined only gradually, in line with the decline in resource sector value added.
  - The investment decline has been cushioned by a strong housing sector, particularly for the construction sector which had relatively higher exposure to mining investment.

### Impact on household incomes, wages, and prices
- Household real incomes have been shielded because profits absorbed much of the decline from the commodity price bust.
- Australia experienced an “income recession” in late-2015 (adjusting GDP for the terms of trade decline).
- Real producer wages have risen sharply since the end of the boom despite weaker nominal wage growth (Chart 3: Producer wage and Consumer wage index, 2000Q1 = 100 references).
- Producer wages stayed relatively low during the boom while the share of profits in income rose and has steadily declined since the 2011 peak in commodity prices.
- Consumer wages rose faster than producer wages during the boom, partly due to exchange rate appreciation.
- Exchange rate pass-through estimates: a 10 percent appreciation is linked with a 1 percent decline in consumer prices.
- On the downswing, depreciation has not translated into retail inflation as expected, potentially due to:
  - Weaker import prices as manufacturing shifts globally to cheaper locations.
  - More domestic retail sector competition.

### Near-term outlook and projections
- Growing resource exports have dampened the negative impact of declining mining investment and will continue to do so in the near term as new capacities ramp up and investment returns to more normal levels.
- Export-related value addition is expected to support a gradual decline in resource value added to around 11 percent of GDP by 2017/18.
- Notes on projections and assumptions:
  - Chart assumptions: Export demand is projected to grow in 2017 and 2018 at 5% each year in 2013/14 prices.
  - Investment is projected to decline to 1.8% of GDP by 2018, and nominal values are inferred from desk forecasts of GDP.
- Measurement note: This measure of value added generation considers only mining exports and investment in plant/machinery and construction in final demand. It excludes value added in the mining sector due to domestic demand for mining output. Results are broadly comparable to the “narrow measure” in Rayner and Bishop (2013), though that narrow measure excludes exports of manufactured resource exports while those are included here.

*Source: IMF staff estimates and Annex I text.*

### 2015. This assessment is subject to un

### Annex IV. External Sector Assessment

### Real exchange rate
- Background
  - The real effective exchange rate (REER) depreciated 7 percent in 2015 relative to its 2014 average.
  - As of June 2016, the REER depreciated by less than ½ percent compared to its 2015 averages.
  - Compared to its thirty-year average, the REER is some 14 percent higher.
  - Continued substantial capital inflows and favorable interest rate differentials may have contributed to the continued relative strength of the Australian dollar.
  - Since mid-2015, the currency has been broadly stable in real effective terms.
- Assessment
  - Staff assesses the REER to be 0 to15 percent above the level implied by medium-term fundamentals and desirable policy settings. 2/

### Capital and financial accounts: flows and policy measures
- Background
  - The mining investment boom has been funded predominantly offshore.
  - Net FDI inflows into this sector have partially offset the reduced need for the banking sector to borrow abroad.
  - As investment in new mining projects winds down, related demand for imports will decrease, buffering the impact on the overall balance of payments.
  - Australia also received large inflows in recent years into bond markets given its sound fiscal position relative to other advanced economies, and owing to relatively high interest rate differentials.
- Assessment
  - Credible commitment to a floating exchange rate and a strong fiscal position limit the vulnerabilities.

### FX intervention and reserves level
- Background
  - A free-floater since 1983.
  - The central bank undertook brief but large intervention in 2007–08 when the market for Australian dollars became illiquid (bid-ask spreads widened) following banking sector disruptions in the U.S.
  - The authorities are strongly committed to a floating regime which reduces the need for reserve holding.
- Assessment
  - Although domestic banks’ external liabilities are sizable, they are either in local currency or hedged with little or no counterparty risks, so reserve needs for prudential reasons are also limited.

### Technical Background Notes (selected)
- EBA CA regression approach for 2016 estimates a CA norm of -1.0 percent of GDP and a CA gap of -1.9 percent of GDP.
- Using estimated elasticities, the current account approach would be consistent with an exchange rate overvaluation of around 11 percent in 2016.
- The NFA stabilizing deficit is closer to 2½-3 percent of GDP.
- Staff assessment: the current account gap is in the range of -2 to 0 percent of GDP. 1/
- The EBA REER regression approach, and the EBA REER level regression provide estimates of a gap encompassing a wide range from 5 to 15 percent in 2016. 2/

*INTERNATIONAL MONETARY FUND — AUSTRALIA (Annex IV excerpt)*

### Annex V. Australia: Risk Assessment Matrix

### Domestic risks
- Stronger recovery momentum
  - Likelihood: M
  - Time horizon: Short term
  - Impact: M
  - Impact description: Business investment could recover faster amid favorable financing conditions and stronger terms of trade. The Australian dollar would likely appreciate; monetary policy tightening if needed.
- Slowing of economic recovery
  - Likelihood: M
  - Time horizon: Short to medium term
  - Impact: M
  - Impact description: Profits may remain under pressure for longer with external disinflation, while consumption growth could be weaker with continued low wage growth and a higher incidence of part-time work. Investment would remain weaker as a result, hurting medium-term growth prospects.
  - Policies to reduce impact: Monetary policy easing with minor slowing; combined monetary and fiscal policy easing if economy hits the zero lower bound.
- Housing market downturn
  - Likelihood: L
  - Time horizon: Short to medium term
  - Impact: H
  - Impact description: A sharp housing market correction would lower residential investment and private consumption. A vicious feedback loop of declining house prices, higher non-performing loans, tighter bank credit, and lower activity could amplify the downturn.
  - Policies to reduce impact: Monetary policy easing; fiscal policy stimulus; measures to facilitate mortgage debt restructuring, including selected fiscal intervention.

### External risks
- Significant China slowdown
  - Likelihood: L/M
  - Time horizon: Short to medium term
  - Impact: H
  - Impact description: A hard landing in China would lead to lower growth and large commodity price declines would lead to a major downturn in Australia.
  - Policies to reduce impact: Combined monetary policy and fiscal policy easing as economy could reach the zero lower bound quickly; structural fiscal measures to facilitate adjustment in commodity sectors and regions, including active labor market policies.
- Structurally weak growth in major advanced and emerging economies
  - Likelihood: H/M
  - Time horizon: Medium term
  - Impact: M
  - Impact description: Lower growth in these economies would result in lower commodity prices and commodity consumption, thereby lead to a major downturn in Australia.
  - Policies to reduce impact: For temporary easing: monetary policy easing; combined monetary and fiscal policy easing if economy hits the zero lower bound. Structural reforms, including fiscal ones, to raise productivity.
- Tighter and more volatile global financial conditions
  - Likelihood: M
  - Time horizon: Short term
  - Impact: M
  - Impact description: Australia would be affected through direct asset price channels, their impact on international funding conditions of Australian banks, and spillovers from their broader effects on global growth and commodity prices. Much would depend on how investor sentiment toward Australia changed.
  - Policies to reduce impact: Monetary policy easing; combined monetary and fiscal policy easing if economy hits the zero lower bound.
- Economic fallout from political fragmentation
  - Likelihood: H
  - Time horizon: Short to medium term
  - Impact: M
  - Impact description: As an open economy depending on trade, Australia would be negatively affected if a rise in populism and nationalism in large economies would reverse trade liberalization, reduce global growth and commodity prices, and exacerbate financial market volatility.
  - Policies to reduce impact: Monetary policy easing; combined monetary and fiscal policy easing if economy hits the zero lower bound. Continued pursuit of open market policies.
- Persistently lower energy prices
  - Likelihood: L
  - Time horizon: Medium term
  - Impact: L
  - Impact description: If fuel prices did not increase as expected, real incomes of consumers would be higher, but coal and LNG sectors would be hurt, as would the coal mining regions. The net effect on the economy would also depend on the global growth impact.
  - Policies to reduce impact: The exchange rate would likely act as a shock absorber and dampen the impact; monetary policy response if needed.

*INTERNATIONAL MONETARY FUND — AUSTRALIA (Annex V excerpt)*

### Annex VI. External and Fiscal Debt Sustainability Analysis

### External debt sustainability (Figure 1 highlights)
- Figure illustrates external debt in percent of GDP with baseline and various shocks:
  - Interest rate shock: baseline 129, i-rate shock 132.
  - Historical scenario: historical 122, baseline 129.
  - CA shock: baseline 129, CA shock 131.
  - Combined shock: baseline 129, combined shock 133.
  - Real depreciation shock: baseline 129, 30% depreciation shown leading to 128 in one scenario.
  - Growth shock: baseline 129, growth shock 131.
- Notes:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs in 2010 in a specified scenario.

### Public sector debt sustainability (selected projections and indicators; as of December 14, 2016)
- Sovereign spreads and market indicators (selected)
  - EMBIG (bp) 3/14
  - Y CDS (bp) 68
  - Ratings: Moody's Aaa/Aaa; S&Ps AAAAAA; Fitch AAAAAA
- Projections (selected series)
  - Nominal gross public debt: 18.0 (2014), 34.2 (2015), 37.6 (2016), 40.9 (2017), 43.2 (2018), 43.5 (2019), 42.4 (2020), 40.7 (2021), 39.0 (cumulative)
  - Public gross financing needs: 1.9 (2014), 3.0 (2015), 2.8 (2016), 5.7 (2017), 5.3 (2018), 4.4 (2019), 3.4 (2020), 2.5 (2021), 2.2 (cumulative)
  - Real GDP growth (in percent): 2.8 (2014), 2.8 (2015), 2.4 (2016), 2.3 (2017), 2.6 (2018), 3.0 (2019), 3.0 (2020), 2.9 (2021)
  - Inflation (GDP deflator, in percent): 3.5 (2014), 0.2 (2015), -0.6 (2016), 1.0 (2017), 1.6 (2018), 1.5 (2019), 2.3 (2020), 2.4 (2021)
  - Nominal GDP growth (in percent): 6.4 (2014), 3.0 (2015), 1.8 (2016), 3.3 (2017), 4.3 (2018), 4.6 (2019), 5.3 (2020), 5.3 (2021)
  - Effective interest rate (in percent): 6.3 (2014), 4.8 (2015), 4.5 (2016), 4.0 (2017), 3.7 (2018), 3.5 (2019), 3.6 (2020), 3.7 (2021), 3.9 (cumulative)
- Change in gross public sector debt
  - 2.1 (2014), 3.5 (2015), 3.4 (2016), 3.2 (2017), 2.3 (2018), 0.3 (2019), -1.1 (2020), -1.7 (2021), -1.7 (cumulative), 1.4 (final)
- Identified debt-creating flows
  - 2.8 (2014), 4.0 (2015), 3.7 (2016), 3.7 (2017), 2.8 (2018), 0.8 (2019), -0.6 (2020), -1.2 (2021), -1.2 (cumulative), 4.4 (final)
  - Primary deficit: 1.6 (2014), 2.0 (2015), 1.8 (2016), 1.9 (2017), 1.7 (2018), 0.8 (2019), -0.2 (2020), -0.9 (2021), -1.0 (cumulative), 2.3 (final)
  - Primary (noninterest) revenue and grants: 33.4, 33.6, 34.0, 34.1, 34.1, 34.4, 34.7, 35.0, 35.1, 207.5 (cumulative)
  - Primary (noninterest) expenditure: 35.0, 35.6, 35.8, 36.0, 35.8, 35.2, 34.6, 34.2, 34.1, 209.8 (cumulative)
- Automatic debt dynamics (interest rate/growth differential)
  - 0.0 (2014), 0.5 (2015), 0.9 (2016), 0.3 (2017), -0.3 (2018), -0.4 (2019), -0.7 (2020), -0.7 (2021), -0.6 (cumulative), -2.4 (final)
  - Real interest rate contribution: 0.5, 1.4, 1.7, 1.1, 0.8, 0.8, 0.5, 0.5, 0.5, 4.2
  - Real GDP growth contribution: -0.4, -0.8, -0.8, -0.8, -1.0, -1.2, -1.2, -1.2, -1.1, -6.6
- Other identified debt-creating flows: 1.1 (2014), 1.4 (2015), 1.1 (2016), 1.6 (2017), 1.4 (2018), 0.5 (2019), 0.2 (2020), 0.3 (2021), 0.4 (cumulative), 4.5 (final)
- Residual: -0.7, -0.5, -0.3, -0.5, -0.5, -0.5, -0.5, -0.5, -0.5, -3.0

### Australia Public DSA - Baseline Scenario (selected underlying assumptions)
- Baseline (2016–2021 projections)
  - Real GDP growth: 2.3 (2016), 2.6 (2017), 3.0 (2018), 3.0 (2019), 2.9 (2020), 2.9 (2021)
  - Inflation: 1.0 (2016), 1.6 (2017), 1.5 (2018), 2.3 (2019), 2.4 (2020), 2.4 (2021)
  - Primary Balance: -1.9 (2016), -1.7 (2017), -0.8 (2018), 0.2 (2019), 0.9 (2020), 1.0 (2021)
  - Effective interest rate: 4.0 (2016), 3.7 (2017), 3.5 (2018), 3.6 (2019), 3.7 (2020), 3.9 (2021)
- Historical Scenario (2016–2021)
  - Real GDP growth: 2.3 (2016), 2.7 (2017), 2.7 (2018), 2.7 (2019), 2.7 (2020), 2.7 (2021)
  - Inflation: same as baseline
  - Primary Balance: -1.9 (2016), -2.0 (2017), -2.0 (2018), -2.0 (2019), -2.0 (2020), -2.0 (2021)
  - Effective interest rate: 4.0 (2016), 3.7 (2017), 3.7 (2018), 3.9 (2019), 4.1 (2020), 4.4 (2021)
- Constant Primary Balance Scenario
  - Primary Balance held at -1.9 across projection years.

*INTERNATIONAL MONETARY FUND — AUSTRALIA (Annex VI excerpt)*

### Annex VII. Summary – Inflation Targeting in Australia: Performance, Challenges and Strategy Going Forward

- Performance
  - The Australian model of flexible inflation targeting has been a success, as evidenced by average inflation consistent with the target, and a substantial moderation in inflation and output volatility.
- Challenges faced post-GFC
  - A slower-than-expected recovery, economic slack, and inflation declining below target in a difficult global economic environment.
  - An increased probability of hitting the effective lower bound (ELB) on nominal policy rates, given declines in the real equilibrium interest rate (EIR) and some possibly large downside risks (e.g. China, European banks, geo-political uncertainty, etc.).
  - Risk of more persistent deviations of inflation below target (“low inflation trap”) and prolonged slack.
- Staff estimates and policy stance
  - Staff estimates of the real EIR in Australia suggest that it has declined from around two percent in mid-2008 to around 1 percent over the past two years.
  - The policy rate has been below the equilibrium throughout most of the post-GFC recovery, indicating that monetary policy has been in a ‘loose’ stance.
  - Recommended prudent policy strategy: a “low for longer” monetary policy stance while preparing for coordinated monetary and fiscal policy easing if downside risks were to materialize.
- Policy recommendations
  - Around the current baseline outlook, a ‘prudent risk-management strategy’ would be to respond more strongly to negative inflation and output surprises than to positive ones.
  - To lower risks of ‘dark corners’, an effective policy response would call for both expansionary monetary and fiscal policies in the event that large negative shocks were to materialize (e.g., lower global growth and commodity prices).
  - Enhancing policy transparency: a more forecast-oriented communication policy which could include more explicit discussion of how the RBA intends to use its policy instruments over time to bring inflation back to target.

*INTERNATIONAL MONETARY FUND — AUSTRALIA (Annex VII excerpt)*

### Annex VIII. Summary – Australia’s Fiscal Framework:  Issues and

### Annex VIII. Summary – Australia’s Fiscal Framework: Issues and Options for Reform

### Overview
- The paper reviews the Government of Australia’s approach to framing fiscal policy, aiming to meet objectives of stabilization, long-term sustainability, and support of intergenerational equity.
- The government’s stated medium-term balance anchor: 1 percent of GDP budget surplus, on average, over the economic cycle, and to control debt accumulation.
- The analysis highlights long-term spending pressures from demographics – pensions, health care, aged care.

### Model and analytical approach
- Analysis is based upon the use of the IMF’s model, G20MOD.
- G20MOD:
  - Comprises the entire world, with a block specifically for Australia.
  - Models households, firms, the government and the central bank, calibrated to match Australia’s macroeconomic and fiscal characteristics.
  - Fiscal sector includes eight tax and spending instruments.
- Rationale: Since government debt levels help determine global interest rates, long-term net foreign asset holdings and real exchange rates, fiscal policy plays a key role in both the short and long term.

### Short-term budget repair: findings and cautions
- Recommendation: short-term budget repair to achieve the medium-term balance anchor.
- Key cautions and findings:
  - There is uncertainty on the required magnitude for budget repair.
  - Achieving the anchor relies on rebalancing away from the domestic to external sector, which may not be a desirable choice of fiscal authorities at this juncture.
  - Budget repair can be very costly under the primary risk of the “new mediocre”.

### Long-term fiscal framework: proposed anchors and rules
- Proposal: implement a long-term debt anchor to provide a stronger long-term fiscal framework.
- To achieve and maintain this anchor, propose an appropriate mix from three types of fiscal rules:
  - An expenditure rule limiting spending growth from 2021-2030—quantifies existing government commitment to reduce the size of government and harks back to expenditure rules used in the past.
  - Medium-term balance anchor (a flexible budget balance rule)—this is the target currently in force.
  - Different configurations of debt rules – both strict and flexible, achieving a new debt target over either a 5- or 10-year horizon.

### Comparison: long-term debt anchor vs. medium-term balance anchor
- Both targets should be met on average over the economic cycle (a degree of flexibility already present in the existing medium-term balance anchor) and communicated clearly through vehicles such as the annual budget and the mid-year updates.
- Advantages of a long-term debt anchor:
  - Provides certainty about the level of the debt and its role in anchoring households’ and firms’ behavior.
  - Provides greater stability for real GDP in both temporary and permanent shocks relative to a medium-term balance anchor.

### Debt-rule scenarios, results, and preferred strategy
- The paper analyzes three different debt rules.
- Examined scenarios include:
  - An example consolidation of 10 percent of debt under the benchmark scenario.
  - Possible alternatives such as stronger aggregate demand and a boom-bust cycle driven by the terms of trade.
- Preferred strategy:
  - A mixed rule strategy that combines an expenditure rule with the flexible debt rule aiming to reduce the debt over 10 years.
  - Assessment based on a number of stabilization and debt-control related indicators.
- Implementation note:
  - The analysis demonstrates that clear communications will ease the transition for the implementation of rules against the background of long-term spending pressures from demographics.

### Short supplement: recent macro developments (staff statement, February 3, 2017)
- Consumer price inflation developments:
  - Headline CPI rose by 0.5 percent compared to the previous quarter, unchanged from the third quarter.
  - On a year-on-year basis, headline CPI rose by 1.5 percent, up from 1.4 percent.
  - Core CPI rose by 0.4 percent against the previous quarter and 1.6 percent compared to the same quarter a year ago, up from an annual rate of 1.5 percent in the previous quarter.
- Labor market:
  - The unemployment rate increased to 5.8 percent in the last quarter of 2016, from 5.6 percent in the previous quarter.
  - The increase reflected a combination of faster labor force growth and slightly lower employment growth compared to developments in the previous quarter.

*Prepared by Asia and Pacific Department; staff report for the 2016 Article IV consultation (informational annex), January 17, 2017; supplement statement dated February 3, 2017.*

### 4. The terms of trade improved by 19.0 percent against the previous quarter, compared to an

### cr1742 - 4. The terms of trade improved by 19.0 percent against the previous quarter, compared to an

### Terms of trade and commodity prices
- The terms of trade improved by 19.0 percent against the previous quarter, compared to an expected improvement of 7.0 percent.
- The stronger outcome largely reflected stronger coal and iron prices.
- Spot prices for these commodities have started to decline recently as expected, partly reflecting increased domestic supply in China.

### Statement and context
- Statement by Christine Barron, Alternate Executive Director for Australia and Christopher Stewart, Advisor to Executive Director
- February 3, 2017
- Key summary: The Australian economy continues to perform well amid one of the largest terms of trade adjustments in its history. The economy is expected to grow at around trend supported by a flexible exchange rate, adaptive macroeconomic policies and strong institutional arrangements, but challenges remain, notably low business investment.

### Recent developments and outlook
- After 25 years of continuous growth, the economy is forecast to grow in line with potential, at about 2¾ per cent.
- The unemployment rate has trended down to stand at 5.8 per cent, around only half a percentage point or so above the non-accelerating inflation rate of unemployment; the authorities estimate the output gap to be of a similar magnitude.
- GDP contracted by 0.5 per cent in the September quarter 2016, heavily influenced by a confluence of one-off factors; the economy is forecast by both the authorities and the IMF to continue to grow in 2017.
- Over the longer term, authorities emphasize that productivity growth will be vital given any decline in the terms of trade and modest wages growth.
- Baseline outlook: continued gradual recovery as the economy transitions from a mining investment boom to broader sources of growth.
  - Majority of the decline in mining investment has already occurred; non-mining investment has begun to grow, albeit slowly.
  - Resource exports expected to contribute strongly as mining production ramps up following a decade of strong mining investment.
  - Tourism and education service exports are increasing in response to the depreciation in the exchange rate since the peak in the terms of trade in late 2011.
  - Economic activity expected to be supported by an increase in public infrastructure investment at both federal and state levels of government.
  - Strong growth in dwelling construction in response to lower interest rates and firm population growth is expected to taper off.
- Inflation and wages:
  - Underlying inflation has been running at about 1½ per cent and is forecast to gradually rise over the next 1-2 years.
  - Longer-term inflation expectations appear well anchored.
  - Growth in wages appears to have stabilised, although at low rates, and is expected to pick up gradually over the next couple of years, in line with further improvements in the labour market.
- Risks:
  - Balance of risks improved but still tilted to the downside.
  - Particular external risk: deterioration in the external sector from adverse developments in larger economies.
  - Domestic uncertainty: pace of pick-up in non-mining business investment.
  - Housing market risks judged manageable: some segments have rapid price gains, but credit growth is not unusually strong and households have significant mortgage buffers.
  - Authorities acknowledge potential for a large external shock to interact with or trigger domestic risks.

### Fiscal policy
- Authorities welcome IMF confirmation of current timetable to return the budget to surplus; note only small differences in path profiles.
- The average annual pace of fiscal consolidation across the forward estimates is 0.5 per cent of GDP.
- Weaker-than-planned budget outcomes in recent years attributed to weaker-than-expected nominal growth leading to weaker-than-expected revenue, rather than policy easing.
- Expenditure growth has slowed, consistent with commitment to repair the budget by controlling expenditure.
- Policy focus:
  - Restrain recurrent spending to create room for productive spending.
  - Support jobs and growth through boosting infrastructure, innovation and investment while rebuilding fiscal buffers.
  - Federal Government investing a record $50 billion in national infrastructure, including the National Broadband Network.
  - State Governments have also increased infrastructure investment.
  - Private investment encouraged through lowering the corporate tax rate (starting with tax reductions for small businesses) and adjustments to personal income tax thresholds to keep average wage earners in lower tax brackets longer.
- If large downside risks materialize, authorities will take a flexible approach while adhering to medium-term framework of achieving budget surpluses, on average, over the cycle.
- Authorities question using infrastructure investment for short-term aggregate demand management given lags; instead focus on public and private investment to raise potential growth.
- Fiscal framework and debt:
  - Authorities welcome discussion of options for reform and suggestion that a long-term debt anchor could strengthen current framework.
  - Commonwealth Government aims to stabilize and then reduce net debt over time — currently expected to peak at about 19 per cent of GDP in 2018-19 before declining to around 10 per cent in 2026-27.
  - Caution against making policy too constrained by a rigid debt anchor.

### Monetary policy
- Monetary policy remains accommodative and supportive of economic growth.
- Decline in inflation in Australia has been more recent and more modest than in other advanced economies; longer-term inflation expectations remain well anchored.
- Neutral cash rate has declined somewhat; monetary policy has ensured finance remains readily available to creditworthy borrowers, supporting dwelling construction and providing a platform for business investment.
- RBA’s flexible inflation-targeting framework positions it to respond to future developments.
- The RBA will consider staff’s suggestion of lengthening its forecast horizon in monetary policy statements to help clarify projections for longer-term inflation and will continue to ensure the public understands its reaction function.

### Financial system
- The Australian financial system remains in good shape in terms of resilience to shocks and ability to support real economic activity; resilience has increased in recent years.
- Banks have improved capital buffers: weighted average CET-1 capital ratios of the four largest Australian banks moving into the upper quartile of international peers on a comparable basis (at about 13.5 per cent as at December 2015).
- Banks expected to steadily accumulate further capital as APRA finalises its assessment of ‘unquestionably strong’ positions.
- Liquidity profiles improved by increasing share of stable funding, including more domestic deposits and longer-term debt.
- Of those authorized deposit-taking institutions subject to the net stable funding ratio (NSFR), most already appear to broadly meet the minimum requirements which come into effect in 2018.
- Major banks’ return on equity currently about 14 per cent.
- Lending standards will remain under scrutiny under APRA’s intensive and risk-based supervision; attention on reinforcing sound lending standards in response to some property market developments.
- Mortgage buffers mitigate riskiness of existing housing loans, borrowers have maintained repayments above required amounts as interest rates fell.
- Council of Financial Regulators will continue to monitor potential risks and take additional steps if necessary; actions aim to improve resilience, not to influence housing prices.
- Authorities monitoring commercial property lending and finalizing legislation to improve crisis management and bank resolution toolkit, in line with Financial System Inquiry recommendations.
- External position:
  - Structure of net external liabilities mitigates macro-financial vulnerability.
  - Current account deficit reflects investment outcomes not fully met by domestic savings.
  - Australia has a net foreign liability position but a net foreign currency asset position, since bulk of foreign liabilities are denominated in, or hedged back into, Australian dollars.
  - Banking sector hedges foreign currency liabilities matching duration of hedges with underlying liabilities.
  - Current account deficit expected to remain towards the low end of its recent historical range; net foreign liabilities stable as share of GDP over the past decade.

### Structural reforms
- Authorities emphasize importance of further reforms to boost productivity growth given terms of trade unlikely to return to previous highs.
- Reform needed to invigorate growth in living standards and create conditions for stronger private investment; weakness in non-mining investment is a prominent symptom of the “new mediocre.”
- Authorities welcome IMF Staff’s focus on fostering innovation and competition.
- National Innovation and Science Agenda intended to support investment, innovation and enterprise, with effectiveness underpinned by annual assessments.
  - First tranche included changing funding arrangements for some government services; second tranche may focus on improving critical science capabilities and business investment in innovation.
- Taxation reform focus from 2015–2016 debates: lowering corporate tax rate and adjustments to personal income tax brackets.
- Competition policy:
  - Implementation of Harper Review recommendations to introduce competition, contestability and consumer choice in provision of largely publicly provided human services.
  - Government initiated inquiries into superannuation industry efficiency and competition in the financial system.
  - Changes to the financial system follow Government acceptance of all but one recommendation from the Financial System Inquiry.
- Productivity Commission tasked with regular reviews of the nation’s productivity performance.
- Australia remains committed to open trade, foreign investment and immigration, benefiting from diversification and integration into Asia and recent FTAs with China, Japan and South Korea; developing new multilateral and bilateral FTAs with major trading partners.

*Source: Statement by Christine Barron and Christopher Stewart, February 3, 2017 (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1742.pdf_