## 1. Growth is Slowing

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### Context
- Drivers that supported strong growth through 2016 weakened in 2017–18: reconstruction spending after the 2011 earthquake, high net migration, a housing boom, and strong terms of trade.
- Inflation has remained weak, reflecting partly imported disinflation and partly the boost to labor supply from net migration.
- Housing boom reduced affordability and raised macrofinancial vulnerabilities; household debt rose to high levels in international comparison.
- Macroprudential tightening in 2014-17 helped mitigate vulnerabilities and house price overvaluation.
- Labor productivity growth has remained low; productivity levels are below the average of high-income OECD countries.
- FY2019/20 budget framed as the first wellbeing budget under the Living Standards Framework (LSF).
- Review of the RBNZ Act updated the monetary policy framework; Phase Two to consider financial policy and regulatory framework updates.
- Minimum wage path: a three-year increase to NZ$20 on April 1, 2021 from NZ$15.75 on Apr 1, 2018 (phased in).

### Recent developments (past 12 months)
- Growth dynamics:
  - Economic growth picked up in early 2019 after slowing in the second half of 2018, driven by a rebound in private business investment and strengthened residential investment.
  - Employment growth slowed markedly in late-2018 but strengthened more recently; the unemployment rate declined below 4 percent in the second quarter of 2019.
- Inflation and wages:
  - Headline inflation: 1.5 percent in 2019Q1 and 1.7 percent in 2019Q2.
  - RBNZ underlying inflation measures remained between ½ and ¼ of a percentage point below the 2 percent midpoint of the target range.
  - Wage inflation has picked up partly due to minimum wage increases.
- Output and labor market slack:
  - Staff estimates: output broadly at potential in early 2019; unemployment below the NAIRU.
  - Underemployment remains elevated; sectoral capacity constraints emerged, notably in construction.
- External sector and exchange rate:
  - Current account deficit widened to 3.8 percent of GDP in 2018.
  - Real effective exchange rate (REER) around 10 percent above its long-term average in 2018.
- Housing market:
  - House sales declined by about 30 percent from their peak in mid-2016.
  - House price inflation stabilized at 1.5 percent y/y nationally by 2019Q1; prices declined in Auckland since mid-2018.
  - Cooling driven by tighter bank mortgage lending standards, RBNZ LVR restrictions (2016-17), declining affordability, improved supply prospects in Auckland, and weaker foreign demand.
  - Despite cooling, residential investment picked up consistent with robust underlying demand and supply constraints.
- Financial soundness:
  - Bank lending slowed across sectors, growing broadly in line with nominal GDP.
  - Lending standards strengthened; modest easing in RBNZ LVR restrictions in Jan 2018 and Jan 2019 led to upticks in new high-LVR loans.
  - Short-term U.S. dollar rates rose, but New Zealand bank funding costs remained broadly stable.

### Outlook
- Near-term and medium-term path:
  - After the pickup, growth expected to remain close to trend; forecast to weaken somewhat in mid-2019 due to external headwinds.
  - Recent monetary easing and increased government spending expected to lift domestic demand, producing a small positive output gap and moving inflation toward the 2 percent midpoint.
  - Medium-term: output growth moderates to potential; potential itself slows modestly, mostly because labor supply growth decreases with expected gradual decline in net migration.
- Potential output drivers:
  - Potential output growth projected to slow over a 5-year horizon, mostly because of lower labor supply growth from declining net migration.
  - Total factor productivity expected to strengthen, but broader capacity constraints (construction and public infrastructure provision) expected to emerge.
- Household macrofinancial vulnerabilities:
  - Baseline projects a decline in vulnerabilities: household debt to disposable income ratio expected to decline from 164 percent in 2018 to 149 percent in 2024.
  - House price inflation expected to stabilize slightly above consumer inflation; residential investment expected to rise at recent rates given approvals and supply shortfalls.

### Risks
- Overall tilt: risks increasingly tilted to the downside.
- Domestic risks:
  - Fiscal policy could be less expansionary if implementation is more gradual than expected.
  - Housing market cooling could turn into a downturn from external shocks or diminished expectations.
  - High household debt could amplify effects of large adverse shocks.
- External risks:
  - Tighter global financial conditions, lower dairy prices, and rising protectionism could negatively affect New Zealand via China and Australia.
- Upside possibilities:
  - Near-term stronger growth if net migration declines more slowly than expected or if terms of trade strengthen.

### Authorities’ views
- Authorities broadly agreed with staff’s outlook and risks: anticipated a pick-up in mid-2019 and through 2020, supported by accommodative monetary policy and near-term fiscal impulse.
- Unemployment seen as close to natural rate; pick-up in growth expected to put pressure on wages and prices toward the mid-point of the inflation target range.
- Concerns: trade tensions, global downside risks, and disruptive effects of digital and other technologies.

### Monetary policy
- RBNZ cut the OCR by 25 basis points in May 2019 and by 50 basis points in August 2019; OCR at 1.0 percent after the two-step easing.
- Real policy rate lowered from around 0 to -¾ of a percent versus an estimated neutral rate of 1-2 percent.
- Staff view: accommodative stance fits subdued inflation; downside risks to growth, employment, and inflation from insufficient accommodation larger than upside inflation risks. Further cuts appropriate if downside risks materialize.
- RBNZ unconventional options listed: forward guidance, negative rates on liquidity facilities, asset purchases if the effective lower bound is reached.

### Fiscal policy
- FY2019/20 budget increases operating and capital allowances modestly; first Wellbeing Budget using the LSF.
- Budget priorities: mental health, child wellbeing and poverty, Māori and Pasifika aspirations, productivity, and digital transformation.
- Staff view: expected fiscal stance provides a near-term boost with prudent debt levels; fiscal impulse projected at 1.5 percent of GDP in 2019.
- Fiscal stance expected to turn mildly contractionary from mid-2020 as government follows Budget Responsibility Rules aiming for net debt reduction to 20 percent of GDP by FY2021/22.
- New target band for net public debt beyond FY2021/22: 15 to 25 percent of GDP.
- Given low debt and strong sovereign rating, New Zealand has substantial fiscal space and is at low risk of public debt distress.

### Policy mix assessment and readiness
- Rebalancing toward moderate fiscal consolidation and accommodative monetary policy appropriate to restore internal and external balance, given exchange rate overvaluation and external imbalances.
- If fiscal stance remained expansionary, earlier monetary tightening would likely be required, amplifying currency overvaluation.
- In a severe downturn, expansionary fiscal policy could mitigate impacts given limited conventional monetary space, but implementation lags—especially in capital spending—are a concern.
- Decisions needed on evaluating wellbeing outcomes to guide and monitor government spending effectiveness.

### Macroprudential policy, LVRs, and household vulnerabilities
- RBNZ relaxed LVR restrictions as mortgage credit growth and house price inflation eased.
- Staff view: scope for further easing macroprudential restrictions is limited because:
  - Household debt remains high at 164 percent of household disposable income.
  - Recent easing of LVR restrictions has stalled or reversed improvements in some macroprudential risk factors.
- Recommendation: Further easing of LVR restrictions should consider impacts on banks’ prudential lending standards and risks from elevated household debt; avoiding further household balance sheet vulnerability would allow easing of LVRs in a market downturn.

### Proposed bank capital framework changes
- RBNZ proposed increasing capital requirements:
  - Capital conservation buffer from 2½ to 7½ percent of risk-weighted assets (RWA).
  - Tier 1 minimum capital adequacy requirements from 8½ percent of RWA currently to 16 percent for domestic systemically important banks (D-SIBs) and 15 percent for smaller banks.
- Expected RBNZ decision timing: a decision is expected in November 2019.
- Deposit insurance proposal (Phase Two of RBNZ Act review): limited deposit protection of up to NZ$50,000 per account per institution would fully cover 90 percent of individual bank depositors but only about 40 percent of the total bank deposits value.
- Staff assessment:
  - Overall expected capital increases would amount to 20-60 percent of current CET1 capital (an additional NZ$13.7 billion), equivalent to 70 percent of bank profits over the proposed 5-year transition period.
  - Staff welcomes reduction in systemic financial risks and suggests flexibility: increase the D-SIB buffer to 2 percent (with a corresponding decrease in the capital conservation buffer), consider mixes of Tier 1 and Tier 2 capital, and set a flexible phase-in period.
  - Need for stronger bank supervision to complement higher capital requirements.

### Housing affordability, policy actions, and staff recommendations
- Demand-side measures implemented:
  - Increase in the accommodation supplement.
  - Extension of the “bright line test” from two to five years.
  - Change in tax treatment of residential rental losses (deductible only from future taxable income from rental properties).
  - Ban on purchase of residential property by nonresidents under the Overseas Investment Amendment Act.
- Supply-side measures and institutions:
  - KiwiBuild objective: build 100,000 affordable homes for first-time home buyers over ten years from 2018; implementation lagging and a reset being considered.
  - Urban Growth Agenda includes planning, zoning, and housing-related infrastructure measures.
  - Establishment of the Ministry of Housing and Urban Development.
  - Establishment of Kāinga Ora―Homes and Communities as lead developer for affordable homes and social housing.
- Staff suggestions:
  - Consider alternatives to government as developer for KiwiBuild objectives, such as temporary tax credits for construction sector technology adoption.
  - Consider tax reforms (e.g., a tax on all vacant land or a broad land tax) to support more efficient land use.
  - Remove the ban on purchases of residential property by nonresidents (staff view: ban is not in line with IMF’s Institutional View on capital flows).
  - Local-level reforms: simplify and standardize zoning and permit local councils to actively plan for housing supply growth and enable planning reforms.
- Evidence on nonresident purchases:
  - Nationwide: overseas buyers who were not “New Zealand Citizens or resident visa holders” acquired 0.5 percent of homes transferred in 2019Q2, down from 2.8 percent in 2018Q2 before the ban.
  - Auckland: the same share decreased to 1.1 percent in 2019Q2 from 6.5 percent in 2018Q2.
  - Note: data do not control for potential nonresident purchases through foreign-owned companies.

### Productivity, structural reforms, and wellbeing agenda
- Capital deepening stalled; total factor productivity growth relatively low compared with peers.
- Government measures in the Living Standards Framework:
  - Introducing an R&D tax credit regime (advanced stage) with broad R&D definition including new digital technologies; focuses on younger firms.
  - Increasing education spending and reforming the vocational education training (VET) sector.
  - Creating the New Zealand Infrastructure Commission, Te Waihanga (NZIC), to be established in October 2019, to enhance procurement, delivery, and set up an infrastructure pipeline.
  - Using wage increases for more inclusive growth via a Fair Pay Agreement Working Group recommendation to reintroduce sector-wide collective bargaining and planned minimum wage increases outlined in 2018.
  - Fostering regional development through the Provincial Growth Fund (PGF) and regional immigration alignment.
- Staff view: the structural reform program’s thrust is adequate; R&D tax credit, VET reform, and NZIC should support productivity and better-targeted public physical capital investment.
- Trade policy and FDI:
  - Authorities continue to pursue an open, multilateral trade regime; central player in RCEP negotiations and implemented CP-TPP.
  - Work on reducing administrative burdens associated with the OIA is welcome.

### Overreach of binding sectoral wage agreements
- Expectation: government will support binding, sector-wide wage agreements for a small number of low-pay, low-skill occupations.
- Trade-offs:
  - Can reduce inequality but may impede economic and labor market adjustment after large shocks.
  - Depending on reach and design, could lower demand for low-skilled labor.

### Staff appraisal — macroeconomic outlook (summary)
- Economic expansion is still solid though momentum slowed; output close to potential and unemployment declined.
- Broader price and wage pressures have not yet emerged despite economy operating close to capacity.
- External position weaker than implied by medium-term fundamentals and policy settings.
- Growth expected to remain close to potential; risks tilted to the downside.
- Monetary easing and fiscal support expected to lead to a small positive output gap and inflation moving toward 2 percent midpoint in 2019-20.

### Financial stability and banking sector
- Scope for easing macroprudential restrictions limited given high macrofinancial vulnerabilities.
- Combined LVR settings and tighter bank lending standards reduced riskier mortgages in bank assets.
- Proposed higher capital conservation buffers:
  - Provide a welcome increase in banking system resilience.
  - Increase bank capital to levels commensurate with systemic financial risks.
  - Scope for flexibility on phase-in period and capitalization mix; differentiate between large and small banks.
  - Stronger bank supervision needed to complement higher capital requirements.
- RBNZ Act Phase Two reforms expected to increase financial system resilience, including deposit insurance and broader macroprudential toolkit.

### Key statistics and projections (selected)
- Current account (percent of GDP): 2018: -3.8; 2019: -4.1; 2020: -4.3; 2021: -4.2; 2022: -4.2; 2023: -4.3; 2024: -4.3.
- Real GDP (annual percent change): 2019: 2.2; 2020: 2.7; 2021: 2.6; 2022: 2.6; 2023: 2.5; 2024: 2.5.
- Consumer prices (avg, % change): 2019: 1.4; 2020: 1.9; 2021: 2.0; 2022: 2.0; 2023: 2.0; 2024: 2.0.
- Official cash rate (policy rate, percent, avg): 2014: 3.1; 2015: 3.2; 2016: 2.2; 2017: 1.8; 2018: 1.8; 2019: 1.5; 2020: 1.3; 2021: 1.3; 2022: 1.7; 2023: 2.3; 2024: 2.7.
- Household debt (percent of disposable income): 2018: 164; 2019: 161; 2020: 157; 2021: 154; 2022: 151; 2023: 149; 2024: 149.
- Household debt servicing: Interest payments (percent of disposable income): 2014: 9.0; 2015: 9.1; 2016: 8.2; 2017: 7.8; 2018: 7.8; 2019: 7.6; 2020: 7.4; 2021: 7.2; 2022: 7.1; 2023: 7.0; 2024: 6.9.
- Net public debt (percent of GDP): 2018: 8.0; 2019: 8.2; 2020: 8.1; 2021: 7.9; 2022: 7.7; 2023: 5.3.
- NIIP: minus 57 percent of GDP at end-2018.
- REER: around 10 percent above long-term average in 2018.
- EBA estimates (REER and CA deviations, selected): REER index regression 2018 = 11%; REER level regression 2018 = 3%; Current account regression 2018 = 9%; External sustainability 2018 = 2%.
- EBA cyclically-adjusted CA norm for 2018: -0.8 percent of GDP; actual cyclically-adjusted CA balance: -3.6 percent of GDP; staff view CA norm closer to -1.6 percent of GDP; estimated CA gap range: -1.6 to -3.2 percent of GDP; EBA elasticity of CA-to-GDP ratio w.r.t. REER = -0.25; implied currency overvaluation ~9 percent (using mid-point).
- External sustainability (ES) approach: NIIP stabilized with CA deficit of 2.8 percent of GDP; adjusted medium-term CA deficit projected at 3.2 percent of GDP; implies currency overvalued by around 2 percent.

### Annex V — Fiscal Policy and Downside Risks (scenario and policy options)
- Downside risk: RBNZ policy rate at a low of 1 percent; effective lower bound (ELB) could bind if major risk materializes (scenario centered on a slowdown in China).
- Fiscal-response packages analyzed: two packages, each instrument pair changed by 0.5 percent of GDP relative to baseline for five years.
- Instruments:
  - Lower-multipliers, quicker to deploy: Government consumption spending; GST rate cut.
  - Higher-multipliers, slower to deploy: Government infrastructure investment; GST rebates targeted to lower-income households.
- Fiscal multipliers:
  - Lower-multiplier package: Real GDP multiplier on impact: 0.7.
  - Higher-multiplier package: Real GDP multiplier on impact: 1.1.
- Open-economy considerations: some leakage through imports; REER would eventually depreciate with fiscal response, stimulating exports; fiscal stimulus more effective if internationally reinforced.
- Implementation timing: high-multiplier package likely to take longer to implement; recommendation to prepare contingency plans and policy preparation to enable rapid deployment of high-multiplier package if needed.

### Annex VIII — Follow-up on 2017 FSAP recommendations (selected implementation updates)
- Strengthen RBNZ resources for supervision and regulation: In process; RBNZ recruiting additional staff; Phase 2 Review examines funding.
- Strengthen cooperation with Australian authorities: In process; crisis simulation exercise in September 2017; follow-up planned.
- Clarify Treasury and RBNZ responsibilities on financial sector issues: In process; examined in Phase 2 Review.
- Issue enforceable supervisory standards and extend enforcement regime: In process; Phase 2 Review examines options.
- On-site programs and supervisory engagement: In process; team formed for cross-cutting review.
- FMA perimeter and supervisory enhancements: In process; thematic reviews and consultations ongoing.
- FMI legislation and PFMI adoption: In process; exposure draft published August 1, 2019; legislation due to be introduced by end of year.
- AML/CFT coverage expansion: Done via AML/CFT Amendment Act 2017; phased coverage from July 1, 2018 to January 1, 2019.
- Macroprudential framework improvements: In process; RBNZ published LVR review and Phase 2 Review examines role and tools.
- DTI measures: In process; public consultation June-August 2017; role included in Phase 2 Review.
- Increase capital buffer requirements for concentrated banking sector: In process; public consultation underway; decisions expected by end-November 2019.
- Crisis management reforms, deposit insurance, and resolution framework: In process; in-principle decision to adopt a deposit insurance framework announced June 2019 as part of Phase 2 Review.

*Source: IMF staff report excerpt, “1. Growth is Slowing.”*

### 1. Growth is Slowing _____________________________________________________________________________ 21

### 1. Growth is Slowing

### Context
- New Zealand’s expansion lost momentum in 2017–18 as drivers that supported strong growth through 2016 weakened: reconstruction spending after the 2011 earthquake, a sustained wave of high net migration, a housing boom, and strong terms of trade.
- Inflation has remained weak, reflecting partly imported disinflation and partly the boost to labor supply from net migration.
- A housing boom reduced affordability and raised macrofinancial vulnerabilities; household debt rose to high levels in international comparison. Macroprudential tightening in 2014-17 helped mitigate vulnerabilities and house price overvaluation.
- Labor productivity growth has remained low, and productivity levels are below the average of high-income OECD countries.
- The FY2019/20 budget is framed as the first wellbeing budget under the Living Standards Framework (LSF). The Review of the RBNZ Act updated the monetary policy framework and entered Phase Two to consider financial policy and regulatory framework updates.
- Minimum wage path noted: a three-year increase to NZ$20 on April 1, 2021 from NZ$15.75 on Apr 1, 2018 (phased in).

### Recent developments (past 12 months)
- Growth dynamics:
  - Economic growth picked up in early 2019 after slowing in the second half of 2018, driven by a rebound in private business investment and strengthened residential investment.
  - Employment growth slowed markedly in late-2018 but strengthened more recently; the unemployment rate declined below 4 percent in the second quarter of 2019.
- Inflation and wages:
  - Headline inflation: 1.5 percent in 2019Q1 and 1.7 percent in 2019Q2.
  - RBNZ underlying inflation measures remained between ½ and ¼ of a percentage point below the 2 percent midpoint of the target range.
  - Wage inflation has picked up partly due to minimum wage increases.
- Output and labor market slack:
  - Staff estimates suggest output was broadly at potential in early 2019, while unemployment was below the NAIRU.
  - Underemployment remains elevated; sectoral capacity constraints have emerged, notably in construction.
- External sector and exchange rate:
  - Current account deficit widened to 3.8 percent of GDP in 2018.
  - The real effective exchange rate (REER) was around 10 percent above its long-term average in 2018.
- Housing market:
  - House sales declined by about 30 percent from their peak in mid-2016.
  - House price inflation stabilized at 1.5 percent y/y nationally by 2019Q1; prices have declined in Auckland since mid-2018.
  - Cooling driven by tighter bank mortgage lending standards, RBNZ LVR restrictions (2016-17), declining affordability, improved supply prospects in Auckland, and weaker foreign demand.
  - Despite cooling, residential investment picked up consistent with robust underlying demand and supply constraints.
- Financial soundness:
  - Bank lending slowed across sectors, growing broadly in line with nominal GDP.
  - Lending standards strengthened; modest easing in RBNZ LVR restrictions in Jan 2018 and Jan 2019 led to upticks in new high-LVR loans.
  - Short-term U.S. dollar rates rose, but New Zealand bank funding costs remained broadly stable.

### Outlook
- Near-term and medium-term path:
  - After the pickup, growth is expected to remain close to trend; forecast to weaken somewhat in mid-2019 due to external headwinds.
  - Recent monetary easing and increased government spending are expected to lift domestic demand, producing a small positive output gap and moving inflation toward the 2 percent midpoint.
  - Medium-term: output growth moderates to potential; potential itself slows modestly, mostly because labor supply growth decreases with expected gradual decline in net migration.
- Potential output drivers:
  - Potential output growth projected to slow over a 5-year horizon, mostly because of lower labor supply growth from declining net migration.
  - Total factor productivity expected to strengthen, but broader capacity constraints (construction and public infrastructure provision) are expected to emerge.
- Household macrofinancial vulnerabilities:
  - Baseline projects a decline in vulnerabilities: household debt to disposable income ratio expected to decline from 164 percent in 2018 to 149 percent in 2024.
  - House price inflation expected to stabilize slightly above consumer inflation; residential investment expected to rise at recent rates given approvals and supply shortfalls.

### Risks
- Overall tilt: risks increasingly tilted to the downside.
- Domestic risks:
  - Fiscal policy could be less expansionary if implementation is more gradual than expected.
  - Housing market cooling could turn into a downturn from external shocks or diminished expectations.
  - High household debt could amplify effects of large adverse shocks.
- External risks:
  - Tighter global financial conditions, lower dairy prices, and rising protectionism could negatively affect New Zealand via China and Australia.
- Upside possibilities:
  - Near-term stronger growth if net migration declines more slowly than expected or if terms of trade strengthen.

### Authorities’ views
- Authorities broadly agreed with staff’s outlook and risks: anticipated a pick-up in mid-2019 and through 2020, supported by accommodative monetary policy and near-term fiscal impulse.
- Unemployment seen as close to natural rate; pick-up in growth expected to put pressure on wages and prices toward the mid-point of the inflation target range.
- Concerns: trade tensions, global downside risks, and disruptive effects of digital and other technologies.

### Policy discussions — Macroeconomic policies for internal and external balance
- Monetary policy:
  - RBNZ cut the OCR by 25 basis points in May 2019 and by 50 basis points in August 2019; OCR at 1.0 percent after the two-step easing.
  - Real policy rate lowered from around 0 to -¾ of a percent versus an estimated neutral rate of 1-2 percent.
  - Staff view: accommodative stance fits subdued inflation; downside risks to growth, employment, and inflation from insufficient accommodation are larger than upside inflation risks. Further cuts would be appropriate if downside risks materialize.
  - RBNZ unconventional options exist (forward guidance, negative rates on liquidity facilities, asset purchases) if the effective lower bound is reached.
- Fiscal policy:
  - FY2019/20 budget increases operating and capital allowances modestly to address cost and capacity pressures; first Wellbeing Budget using the LSF.
  - Budget priorities include mental health, child wellbeing and poverty, Māori and Pasifika aspirations, productivity, and digital transformation.
  - Staff view: expected fiscal stance provides a near-term boost with prudent debt levels; fiscal impulse projected at 1.5 percent of GDP in 2019 is helpful given slowing growth and cyclical position.
  - The fiscal stance expected to turn mildly contractionary from mid-2020 as government follows Budget Responsibility Rules aiming for net debt reduction to 20 percent of GDP by FY2021/22.
  - New target band for net public debt beyond FY2021/22: 15 to 25 percent of GDP to provide a transparent medium-term anchor while allowing flexibility.
  - Given low debt and strong sovereign rating, New Zealand has substantial fiscal space and is at low risk of public debt distress.
- Policy mix assessment:
  - Rebalancing toward moderate fiscal consolidation and accommodative monetary policy is appropriate to restore internal and external balance, given exchange rate overvaluation and external imbalances.
  - If fiscal stance remained expansionary, earlier monetary tightening would likely be required, amplifying currency overvaluation.
- Readiness and implementation concerns:
  - In a severe downturn, expansionary fiscal policy could mitigate impacts given limited conventional monetary space, but implementation lags—especially in capital spending—are a concern.
  - Decisions are needed on evaluating wellbeing outcomes to guide and monitor government spending effectiveness.

*Source: IMF staff report excerpt, “1. Growth is Slowing.”*

### 25.      The conduct of fiscal policy will remain prudent even with greater focus on fostering

### 25.      The conduct of fiscal policy will remain prudent even with greater focus on fostering wellbeing and related spending increases

### Fiscal policy, Wellbeing Budget, and debt targets
- The Wellbeing Budget is a framework to ensure improved targeting of government spending with a multi-year horizon; new spending priorities have not replaced earlier ones (infrastructure and the Provincial Growth Fund continue).
- Authorities reaffirmed commitment to the Budget Responsibility Rules, including the aim to reduce net public debt to 20 percent of GDP by FY2021/2022.
- Authorities did not see a need to modify the Budget Responsibility Rules, noting they allow for deviations subject to any significant shocks.
- Government is considering a medium-term net debt anchor with a range between 15 and 25 percent of GDP to provide more flexibility over the cycle while maintaining a large debt buffer for emergencies (e.g., another extensive natural disaster or a large economic downturn).

### Preparedness for a severe downturn
- RBNZ is considering how to use its balance sheet most effectively given the small amount of government debt outstanding.
- Fiscal authorities’ main concern is readiness for a timely, effective response given implementation lags, especially in capital spending.

### Managing macrofinancial risks — LVRs and household vulnerabilities
- RBNZ relaxed LVR restrictions as mortgage credit growth and house price inflation eased.
- Staff view: scope for further easing macroprudential restrictions is limited because:
  - Household debt remains high at 164 percent of household disposable income.
  - Recent easing of LVR restrictions has stalled or reversed improvements in some macroprudential risk factors.
- Recommendation: Further easing of LVR restrictions should consider impacts on banks’ prudential lending standards and risks from elevated household debt; avoiding further household balance sheet vulnerability would allow easing of LVRs in a market downturn.

### Proposed bank capital framework changes
- RBNZ proposed increasing capital requirements:
  - Capital conservation buffer from 2½ to 7½ percent of risk-weighted assets (RWA).
  - Tier 1 minimum capital adequacy requirements from 8½ percent of RWA currently to 16 percent for domestic systemically important banks (D-SIBs) and 15 percent for smaller banks.
- Expected RBNZ decision timing: a decision is expected in November 2019.
- Deposit insurance proposal (Phase Two of RBNZ Act review): limited deposit protection of up to NZ$50,000 per account per institution would fully cover 90 percent of individual bank depositors but only about 40 percent of the total bank deposits value.
- Staff assessment of capital increases:
  - Overall expected capital increases would amount to 20-60 percent of current CET1 capital (an additional NZ$13.7 billion), equivalent to 70 percent of bank profits over the proposed 5-year transition period.
  - Staff sees a welcomed reduction in systemic financial risks from the increase.
  - Staff suggests scope for flexibility: increase the D-SIB buffer to 2 percent (with a corresponding decrease in the capital conservation buffer), consider mixes of Tier 1 and Tier 2 capital, and set a flexible phase-in period to ease transition.
  - Staff stresses the need for stronger bank supervision to complement higher capital requirements.

### Review of RBNZ Act — Phase Two and crisis management
- Phase Two of the Review of the RBNZ Act focuses on updating regulatory, supervisory, and macroprudential functions.
- Authorities announced an in-principle decision to introduce a deposit insurance framework as part of crisis-management reform — a break from past rejection on moral hazard grounds.
- Staff welcomes the in-principle decision as consistent with the 2017 FSAP recommendation and emphasizes the importance of operational independence and additional resources to strengthen RBNZ’s supervisory and regulatory functions.

### Housing affordability — demand, supply, and institutional measures
- Demand-side measures already implemented include:
  - Increase in the accommodation supplement (cash subsidy linked to actual rents or home ownership costs for low-income recipients).
  - Extension of the “bright line test” from two to five years.
  - Change in tax treatment of residential rental losses (deductible only from future taxable income from rental properties).
  - Ban on purchase of residential property by nonresidents under the Overseas Investment Amendment Act.
- Supply-side measures and implementation:
  - KiwiBuild objective: build 100,000 affordable homes for first-time home buyers over ten years from 2018; implementation is lagging and a reset is being considered, likely smaller in scale and more regional needs-based, prioritizing social housing and rent support for low-income households.
  - Urban Growth Agenda includes planning, zoning, and housing-related infrastructure measures.
- Institutional changes:
  - Establishment of the Ministry of Housing and Urban Development.
  - Establishment of Kāinga Ora―Homes and Communities as lead developer for affordable homes and social housing.

### Housing policy staff views and recommendations
- Improving housing affordability would lower macrofinancial risks and contribute to more sustainable growth; under the baseline, house prices are expected to continue rising.
- Supply-side reforms are central; additional direct support may be required for lower-income households.
- Policy suggestions:
  - Consider alternatives to government as developer for KiwiBuild objectives, such as temporary tax credits for construction sector technology adoption.
  - Consider adding tax reforms (e.g., a tax on all vacant land or a broad land tax) to support more efficient land use.
  - Remove the ban on purchases of residential property by nonresidents (staff view: ban is not in line with IMF’s Institutional View on capital flows).
  - Local-level reforms: simplify and standardize zoning and permit local councils to actively plan for housing supply growth and enable planning reforms.

### Evidence on nonresident purchases (property transfer and tax residency data)
- Nationwide: overseas buyers who were not “New Zealand Citizens or resident visa holders” acquired 0.5 percent of homes transferred in 2019Q2, down from 2.8 percent in 2018Q2 before the ban.
- Auckland: the same share decreased to 1.1 percent in 2019Q2 from 6.5 percent in 2018Q2.
- Note: these data do not control for potential nonresident purchases through foreign-owned companies.

### Supporting wellbeing and inclusive growth — productivity and structural reforms
- Context and challenges:
  - Capital deepening has stalled and total factor productivity growth has been relatively low compared with peers.
  - Structural features (remote location, small domestic market, lack of interconnectedness) explain much of low productivity growth but policy can mitigate some effects (e.g., technology diffusion).
- Government measures in the Living Standards Framework to foster productivity:
  - Introducing an R&D tax credit regime (advanced stage) with broad R&D definition including new digital technologies; focuses on younger firms.
  - Continuing to increase education spending and reform the vocational education training (VET) sector.
  - Creating a New Zealand Infrastructure Commission, Te Waihanga (NZIC), to be established in October 2019, to enhance procurement, delivery, and set up an infrastructure pipeline.
  - Using wage increases for more inclusive growth via a Fair Pay Agreement Working Group recommendation to reintroduce sector-wide collective bargaining and planned minimum wage increases outlined in 2018.
  - Fostering regional development through the Provincial Growth Fund (PGF) and regional immigration alignment.
- Staff view: the structural reform program’s thrust is adequate; R&D tax credit, VET reform, and NZIC should support productivity and better-targeted public physical capital investment.

*Source: IMF country report chapter content provided.*

### 46.      Overreach of binding sectoral wage agreements should be avoided. The government

### 1nzlea2019002 - 46.      Overreach of binding sectoral wage agreements should be avoided. The government

### Overreach of binding sectoral wage agreements
- The government has not yet responded to the recommendations of the working group.
- The expectation is that the government will support binding, sector-wide wage agreements for a small number of low-pay, low-skill occupations.
- Trade-offs to consider:
  - While such agreements can help in reducing inequality, they may also impede economic and labor market adjustment after large shocks.
  - Depending on reach and design, they could also lower demand for low-skilled labor.

### Trade policy and foreign direct investment
- The authorities’ continued pursuit of an open, multilateral trade regime is commendable.
- New Zealand remains a central player in the Regional Comprehensive Economic Partnership (RCEP) negotiation process and has implemented the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP).
- Given that foreign direct investment complements the productivity benefits of international trade, the current work on reducing the administrative burdens associated with the OIA is welcome.

### Authorities’ views and ongoing initiatives
- The government is continuing its multi-pronged approach to boosting productivity as part of its broader focus on wellbeing.
- Initiatives being completed or pursued include:
  - an R&D tax credit to foster innovation by young firms and increase R&D spending to 2 percent of GDP;
  - the provision by NZIC of market information on a pipeline of infrastructure projects and considering the introduction of new reserve powers to ensure that investment is in New Zealand’s national interest;
  - further reforming the OIA by streamlining processes for foreign direct investment;
  - reforming the VET sector to strengthen human capital.
- The government remains committed to deeper economic integration through international trade, with continued involvement in the negotiations for the RCEP, an upgraded free trade agreement (FTA) with China and a new FTA with the European Union.

### Staff appraisal — macroeconomic outlook
- Economic expansion and labor market:
  - New Zealand’s economic expansion is still solid.
  - Despite the loss of momentum in economic activity and a cooling in housing markets, output has remained close to potential, and the unemployment rate has continued to decline.
  - Broader price and wage pressures have not yet emerged even though the economy has operated close to capacity for some time.
- External position:
  - The external position was weaker than implied by medium-term fundamentals and policy settings.
- Growth outlook and risks:
  - Economic growth is expected to remain close to that of potential output, but risks to the growth outlook are tilted to the downside.
  - After increasing in early 2019, growth is expected to strengthen further in 2019-20 on the back of monetary and fiscal policy support, eventually leading to a small positive output gap and a gradual acceleration of inflation towards the 2 percent midpoint of the RBNZ’s target range.
  - Downside risks to the economic outlook in New Zealand have increased, reflecting higher downside risks to the global economic outlook.

### Monetary and fiscal policy assessment
- Monetary policy:
  - The recent monetary policy easing fits the subdued inflation conditions and near-term risks to the outlook.
  - Economic growth is only expected to remain close to potential on the back of a timely increase in macroeconomic policy support.
  - With downside risks to growth, employment, and inflation, insufficient monetary accommodation still is a bigger concern than the upside risk to inflation if the monetary policy stance were to turn out to be too expansionary.
- Fiscal policy:
  - Fiscal policy strikes an adequate balance between near-term demand support and maintaining prudent debt levels.
  - The FY2019/20 budget supports new wellbeing initiatives and should provide modest near-term stimulus to aggregate demand.
  - While New Zealand has substantial fiscal space, the continued emphasis on meeting the medium-term debt objectives highlights the government’s commitment to maintaining the fiscal buffers needed to respond to potential large economic downturns and other contingencies such as natural disasters.
  - The planned move from time-bound point targets for net public debt to a target range of 15 to 25 percent of GDP as a medium-term debt anchor provides for a welcome increase in flexibility.
- Contingent responses:
  - The New Zealand authorities should prepare contingent policy responses in the event of a severe economic downturn.
  - With the policy rate approaching its effective lower bound, the RBNZ will likely have to resort to an unconventional monetary policy response.
  - On the fiscal side, readiness for a timely, effective response, given long implementation lags, especially in capital spending, will be essential.

### Financial stability and macroprudential policy
- Scope for easing macroprudential restrictions is limited, given still-high macrofinancial vulnerabilities.
- The combined impact of the LVR settings and tighter bank lending standards has led to a decline in riskier mortgages in bank assets.
- While house price inflation and credit growth have moderated, any further easing of LVR restrictions should consider the possible impact on banks’ prudential lending standards, as well as the risks to financial stability from high household debt.
- Proposed higher capital conservation buffers:
  - Would provide for a welcome increase in banking system resilience.
  - The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the banking system.
  - Starting from a relatively strong position, there is scope for some flexibility when setting some parameters in the revised capital framework, including the length of the phase-in period and types of capital within the buffers.
  - The new framework should also differentiate more between large and small banks.
  - A stronger bank supervision regime would still be needed, to complement the higher capital requirements.
- RBNZ Act Phase Two reforms:
  - The main reforms envisaged in the ongoing Phase Two of the Review of the RBNZ Act should increase financial system resilience.
  - Upgrades to the regulatory and supervisory framework would advance key areas of reform identified in the IMF’s 2017 Financial Sector Assessment Program, including enhancing the RBNZ’s resources and operational independence for its supervisory and regulatory functions, broadening the macroprudential toolkit, and introducing a deposit insurance framework.

### Housing affordability and supply constraints
- Mitigating supply constraints is critical for housing affordability and requires further progress in the government’s comprehensive housing policy agenda.
- The reform of the institutional structure, including the establishment of the Ministry of Housing and Urban Development, should help in implementing housing policies.
- Further work is needed to complete the agenda, including enabling local councils to actively plan for and increase housing supply growth.
- Tax reform, such as a tax on all vacant land, should also be considered.

### Productivity concerns and reforms
- Addressing long-standing low productivity growth continues to be a central concern.
- Important first steps taken include:
  - the introduction of a new R&D tax credit regime;
  - the creation of the New Zealand Infrastructure Commission to help in closing infrastructure gaps;
  - the reform of the vocational education and training sector.

*Source: 1nzlea2019002 - 46.      Overreach of binding sectoral wage agreements should be avoided. The government*

### 59.      It is expected that the next Article IV Consultation with New Zealand will be held on

### 1nzlea2019002 - 59.      It is expected that the next Article IV Consultation with New Zealand will be held on

### Growth and Domestic Demand
- Economic growth has slowed; Real GDP (y/y % change) series shown for 2008–2019 with projection through 2021 (figures present growth performance).
- Contributions to growth (2008–2021 series) show lower growth in domestic and external demand with components:
  - Government consumption, Private consumption, Net exports, Investment contributions to Real GDP growth (percent).
- Real gross domestic income and per capita indicators:
  - Real net national disposable income per capita series (1,000 NZ$; RHS) shown alongside Real GDP.
  - Real gross domestic income growth figures in Table 1: 2014: 5.3; 2015: 1.8; 2016: 4.7; 2017: 4.0; 2018: 2.2; 2019: 2.1; 2020: 3.0; 2021: 2.9; 2022: 2.8; 2023: 2.5; 2024: 2.6.
- Agricultural commodity prices were relatively weak in 2018; Export Commodity Price Indices (Jan 1986=100) show Dairy, Meat, skin & wool trends.
- Consumption growth slowed with income/wealth dynamics: Gross disposable income, Consumption, Net worth (RHS) shown (Y/Y % change).
- Business confidence is low and weighing on investment; Business sentiment (pps deviation from average; RHS) and Business investment (m NZ$) series shown.
- Net immigration remains relatively high; Population Growth and Migration (%): Population, Net migration (lagged 2Q), Natural increase series.

### Monetary Policy and Inflation
- Core inflation is stuck in the lower half of the RBNZ target band; CPI Inflation (Y/Y % change) series provided with RBNZ target band.
- Tradables inflation is primarily weak; CPI Inflation decomposition: Headline, Nontradables, Tradables (Y/Y % change).
- Resource pressure indicators:
  - Capacity utilization (deviation from average) and Unemployment rate (RHS) series (Indicators of Resource Pressure).
  - Unemployment is low and capacity utilization in manufacturing and construction is high.
- Policy rate and mortgage rates:
  - Official cash rate (policy rate, percent, avg) in Table 1: 2014: 3.1; 2015: 3.2; 2016: 2.2; 2017: 1.8; 2018: 1.8; 2019: 1.5; 2020: 1.3; 2021: 1.3; 2022: 1.7; 2023: 2.3; 2024: 2.7.
  - Policy rate is at a record low and banks have lowered mortgage rates.
- Credit and housing finance:
  - Credit growth moderating led by softening housing credit; Credit (Y/Y % change) and Housing (Y/Y % change) series shown.
  - House prices: New Zealand and regional series (Auckland area, excl. Auckland area) show easing house price inflation.

### External Sector and Exchange Rates
- Real exchange rate has risen while the terms of trade have declined:
  - Terms of trade (2002Q2=1) and Trade-weighted exchange rate (2002Q2=1) series; US$/NZ$ (RHS).
- Current account and trade balances:
  - Current account (% GDP) series: widening deficit shown (Figure 3).
  - Table 3 Current account (percent of GDP): 2014: -3.1; 2015: -3.0; 2016: -2.2; 2017: -2.9; 2018: -3.8; 2019: -4.1; 2020: -4.3; 2021: -4.2; 2022: -4.2; 2023: -4.3; 2024: -4.3.
- Export and import volumes:
  - Export Volume (4-quarters ma; y/y % change) components: Total, Services, Dairy, Meat.
  - Import Volume (4-quarters ma; y/y % change) series for Goods and Services; import growth has strengthened gradually.
- Export composition and destinations:
  - Services’ contribution to export growth remains important.
  - Exports by Destination series show China becoming the largest export destination (percentage shares listed across countries for 2003 vs 2018).

### Fiscal Position and Public Finances
- Fiscal position remains strong despite higher spending:
  - Net Public Debt (% GDP; 2018) chart places NZL among low public debt countries.
- General government revenue and expenditure (percent of GDP) series and projections (2010/11–2024/25).
- Fiscal impulse and balances:
  - Fiscal Impulse (% nominal potential GDP) chart shows a short-lived positive fiscal impulse.
  - Overall and Operating Balance (% GDP) series presented.
- Net lending/borrowing and net debt projections:
  - Table 1 General Government: Net lending/borrowing: 2014: -0.5; 2015: 0.2; 2016: 0.9; 2017: 1.1; 2018: 0.8; 2019: 0.1; 2020: 0.0; 2021: 0.5; 2022: 1.1; 2023: 1.4; 2024: 1.4.
  - Gross debt series in Table 1: 2014: 34.2; 2015: 34.4; 2016: 33.5; 2017: 31.6; 2018: 29.8; 2019: 29.6; 2020: 30.2; 2021: 30.6; 2022: 31.3; 2023: 28.5 (percent of GDP).
  - Net debt series in Table 1: 2014: 10.4; 2015: 9.8; 2016: 9.1; 2017: 8.0; 2018: 8.0; 2019: 8.2; 2020: 8.1; 2021: 7.9; 2022: 7.7; 2023: 5.3 (percent of GDP).
- Government balance sheet and net worth:
  - Net worth (RHS) and General Government Investment and Balance Sheet (% GDP) shown; Net worth figures in Table 2: 2013/14: 77.4; 2014/15: 82.6; 2015/16: 80.6; 2016/17: 86.5; 2017/18: 90.7; 2018/19: 85.9; 2019/20: 85.8; 2020/21: 84.0; 2021/22: 86.4; 2022/23: 82.0; 2023/24: 81.9.

### Housing Market, Households, and Macroprudential Indicators
- Housing market cooled: growth in new housing loans has slowed; New Residential Mortgage Lending (Y/Y % change) by borrower type (First home buyer, Other owner occupier, Investor) shown for 2015–2019.
- Regional house price inflation lower with differences:
  - Residential House Prices: Regional Differences (Y/Y % change) for New Zealand, Auckland area, Wellington area for 2014–2019.
- House sales subdued and expectations stabilized:
  - House Prices and Sales (Y/Y % change) and House Price Expectations (Y/Y % change) series with household and professional forecasts.
- Residential investment and building activity:
  - Residential Investment ratio (% of nominal GDP) and Y/Y % change (real, RHS) series; Consents issued and Work put in place (NZ$, y/y % change) series.
- Household debt and leverage:
  - Household debt (percent of disposable income) series in Table 1: 2014: 154; 2015: 158; 2016: 161; 2017: 163; 2018: 164; 2019: 161; 2020: 157; 2021: 154; 2022: 151; 2023: 149; 2024: 149.
  - Debt servicing (percent of disposable income) and interest payments: Table 1 Interest payments (percent of disposable income) series: 2014: 9.0; 2015: 9.1; 2016: 8.2; 2017: 7.8; 2018: 7.8; 2019: 7.6; 2020: 7.4; 2021: 7.2; 2022: 7.1; 2023: 7.0; 2024: 6.9.
  - Household leverage by income quintile (median liabilities in thousands of NZ$, June 2018) presented; Richer households have higher other real estate loans.
- High DTI and LVR dynamics:
  - Share of High DTI Loans and Share of high LVR new lending picked up after relaxation of macro-prudential measures in 2018 and 2019; stock of high LVR mortgage lending series shown.
- Risk trends improving:
  - New principal and interest loans to investors and interest-only loans to investors declined.
  - Outstanding interest-only and high loan-to-value mortgages have stabilized.

### Banking Sector and Financial Stability
- Banks are well capitalized and highly profitable:
  - Financial indicators: Regulatory capital to risk-weighted assets series (Table 5) and profitability (Return on equity, Return on assets) plotted.
  - Capital adequacy metrics (Table 5): Regulatory capital to risk-weighted assets: 2012: 13.1; 2013: 12.5; 2014: 12.4; 2015: 13.5; 2016: 13.7; 2017: 14.7; 2018: 15.0.
  - Return on equity (percent) in Table 5: 2012: 11.4; 2013: 13.9; 2014: 14.1; 2015: 12.0; 2016: 12.6; 2017: 13.9; 2018: 13.0.
- Credit and deposit dynamics:
  - Credit growth has slowed from its peak; Household deposits growth trending down.
  - Private sector credit (in billions of NZ$) in Table 4: 2014: 355; 2015: 382; 2016: 409; 2017: 429; 2018: 452; 2019: 476; projections through 2024 rising to 601.
  - Household deposits (in billions of NZ$) in Table 4: 2014: 131; 2015: 145; 2016: 156; 2017: 167; 2018: 177; 2019: 184; projections to 233 by 2024.
- Liquidity and funding positions improved:
  - Funding maturity mismatch improved; core funding ratio well above regulatory minimum (Core funding ratio values shown in Figures and Table 5: 2012: 85.6; 2013: 85.5; 2014: 86.3; 2015: 85.8; 2016: 87.2; 2017: 88.7; 2018: 87.0).
  - Growth in funding needs slowed with lower reliance on offshore market funding; Total Funding (In billions of $NZ) series show Market, offshore; Market, domestic; Non-market components.
- Credit concentration:
  - Over one-half of banks’ loans are exposed to the housing sector; Loans by Purpose (% of total, May 2019) shows Housing (owner occupiers) and Housing (investors) as large shares.

### Macro-structural Issues and Productivity
- Productivity performance and R&D:
  - Multifactor Productivity Growth (% year-over-year) shows New Zealand has had the lowest productivity growth post GFC relative to peers (2010-2017 average vs 2001-2007 average).
  - R&D Expenditures (Percent of GDP) by Government, Business, University: New Zealand series shown alongside comparator countries; R&D spending remains low in comparison.
- Infrastructure and trade:
  - Investment gaps in basic infrastructure identified as potential to augment productivity; Global Infrastructure Outlook and infrastructure indicators referenced.
  - Trade environment conducive to strong foreign relationships; Ease of Conducting Trade (0 to 2; 2 is best) indicators show New Zealand relative to Asia and OECD.
- Services exports:
  - Exports of Services (% GDP) series show All Services, Tourism, Education contributions and geographic shift toward China and India.

### Key Macroeconomic and Financial Projections (Selected Table 1 and 3 Highlights)
- Real GDP (production) projections (annual percent change) in Table 1:
  - 2019: 2.2; 2020: 2.7; 2021: 2.6; 2022: 2.6; 2023: 2.5; 2024: 2.5.
- Private consumption (Table 1) projections:
  - 2019: 3.1; 2020: 3.0; 2021: 2.6; 2022: 2.4; 2023: 2.3; 2024: 2.3.
- Investment (percent of GDP) (Table 1): 2019: 24.1; 2020: 24.0; 2021: 23.9; 2022: 23.8; 2023: 23.7; 2024: 23.6.
- Consumer prices (avg, % change) (Table 1): 2019: 1.4; 2020: 1.9; 2021: 2.0; 2022: 2.0; 2023: 2.0; 2024: 2.0.
- Household debt (percent of disposable income) path (Table 1) cited above under Housing.
- Current account trajectory (Table 3) cited under External Sector.

*Source: IMF staff report and associated tables and figures (New Zealand). *

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overview
- With the real effective exchange rate (REER) still above its long-term average and considering the External Balance Assessment (EBA) estimates, the external position in 2018 was assessed to be weaker than implied by fundamentals and desired policy settings, while the New Zealand dollar is moderately overvalued.

### Current account (CA) and net international investment position (NIIP)
- New Zealand has historically run a current account deficit, averaging close to 4 percent of GDP over the past few decades.
- These deficits reflect a long-standing structural savings-investment imbalance and have resulted in a sizeable negative NIIP.
- New Zealand’s NIIP amounted to minus 57 percent of GDP at the end of 2018.
- The current account deficit has generally remained below the long-term average in the current expansion. Domestic demand and, to some extent, the income (quantity) effects of increases in the terms of trade have driven the expansion.
- The related deterioration in the real trade balance was broadly offset by:
  - the price effects of the terms of trade, and
  - a lower primary income deficit, with the latter reflecting the decline in interest rates globally.

### REER, exchange-rate dynamics, and indicators of external imbalance
- Several indicators suggest that New Zealand’s external imbalance was excessive.
- New Zealand’s REER was some 10 percent above its long-term average, consistent with the strong terms of trade and relatively strong domestic demand.
- In the first half of 2018:
  - the terms of trade declined by 3 percent (compared to the 2017 average), and
  - the REER depreciated by 4 percent.
- In late 2018 the REER rebounded by 2 percent, consistent with a shift in expectation for a relatively more dovish monetary policy stance in major advanced economies and a small rebound in the terms of trade.

### EBA exchange-rate and current-account assessments (2016–2018)
- The EBA REER index and level regressions suggest that the New Zealand dollar was overvalued in real effective terms in 2018. The models imply:
  - REER index regression: 2016 = 7%, 2017 = 15%, 2018 = 11%
  - REER level regression: 2016 = 2%, 2017 = 10%, 2018 = 3%
  - Current account regression: 2016 = 3%, 2017 = 4%, 2018 = 9%
  - External sustainability: 2016 = 5%, 2017 = 1%, 2018 = 2%
- The EBA current account regression suggests that the current account deficit in 2018 was weaker than implied by fundamentals and desired policy settings.
  - The estimated cyclically-adjusted CA norm for 2018 was -0.8 percent of GDP.
  - The actual, cyclically-adjusted CA balance was -3.6 percent of GDP.
  - Staff’s view: the CA norm is closer to -1.6 percent of GDP (reflecting traditionally large investment needs due to New Zealand’s size, low population density, and initial conditions).
  - With this adjustment, the estimated CA gap is in the range of -1.6 to -3.2 percent of GDP.
  - Applying the EBA-estimated elasticity of the current-account-to-GDP ratio with respect to the REER of -0.25 to the mid-point of this range translates the gap into a currency overvaluation of around 9 percent.
- Policy gaps in New Zealand currently contribute to lowering the CA gap, everything else equal, and therefore to currency overvaluation.
- In the longer term, the government’s planned gradual fiscal consolidation should help to narrow the current account deficit by boosting national savings.

### External sustainability (ES) approach and NIIP dynamics
- The NIIP level and trajectory are close to being sustainable.
  - The ES approach suggests that the NIIP would be stabilized at current levels with a CA deficit of 2.8 percent of GDP.
  - The adjusted medium-term CA deficit is projected at 3.2 percent of GDP.
  - This implies that the currency is overvalued by around 2 percent.
- The structure of New Zealand’s external balance sheet reduces vulnerability associated with its large negative NIIP:
  - External NIIP liabilities are mainly in New Zealand dollars.
  - There is a net foreign currency asset position; a nominal depreciation tends to strengthen the external balance sheet, all else equal.
  - The banking sector has a net foreign currency liability position, but it is fully hedged.

### Other considerations and policy-relevant institutional features
- The New Zealand dollar has been freely floating since 1985.
- The central bank undertook a brief but large intervention in 2007–08 when the market for New Zealand dollars became illiquid (bid-ask spreads widened) following banking sector disruptions in the United States.
- The authorities are strongly committed to a floating regime, which reduces the need for reserve holding.

*Source: Annex I. External Sector Assessment (from the provided IMF content).*

### Annex V.  Fiscal Policy and Downside Risks

### Annex V. Fiscal Policy and Downside Risks

### Downside risk context and monetary constraint
- Global risk profile increasingly tilted to the downside while the RBNZ’s policy rate is already at a low of 1 percent.
- If a major risk materializes (scenario centered on a slowdown in China in line with the risk assessment matrix in Annex II), the effective lower bound (ELB) on nominal interest rates might constrain monetary policy.
- Macroeconomic impact of a slowdown in China on New Zealand would be:
  - Relatively small if the RBNZ could cut the policy rate.
  - Much larger if the RBNZ could not cut the policy rate (Figure V.1, blue versus red lines).

### Fiscal response options and assumed sizing
- Two fiscal-response packages are analyzed; each instrument pair is simulated as being changed by 0.5 percent of GDP relative to their baseline paths for five years.
- Instruments considered (opposite ends of the multiplier spectrum):
  - Lower multipliers, quicker to deploy:
    - Government consumption spending.
    - GST rate cut.
  - Higher multipliers, slower to deploy:
    - Government infrastructure investment.
    - GST rebates targeted to lower-income households.

### Fiscal multipliers and transmission
- Lower-multiplier stimulus:
  - Real GDP multiplier on impact: 0.7.
  - Mechanisms:
    - Government spending increases aggregate demand.
    - Temporary GST rate cut raises disposable incomes, primarily supporting consumption for lower-income, credit-constrained households.
- Higher-multiplier stimulus:
  - Real GDP multiplier on impact: 1.1.
  - Mechanisms:
    - Public infrastructure investment lifts near-term aggregate demand and raises productivity, encouraging more private investment.
    - Targeted GST rebates have a larger marginal propensity to consume than a general GST rate cut because they affect households more likely to spend the rebate.

### Open-economy considerations and international reinforcement
- Some leakage of fiscal stimulus abroad is expected due to New Zealand’s openness; many goods purchased using stimulus funds would be imported.
- Given leakage, the REER would eventually depreciate with a fiscal policy response, stimulating exports.
- Fiscal stimulus in New Zealand would be reinforced if other countries also used fiscal stimulus to counter the slowdown in China (Figure V.2).

### Implementation, timing, and policy preparation
- Implementation speed differs by package:
  - High-multiplier fiscal package likely to take longer to implement, especially without a pipeline of infrastructure projects and nimble administrative capacity.
  - Lower-multiplier instruments are quicker to deploy.
- Recommendation: Contingency planning and policy preparation could ensure rapid implementation of a high-multiplier package if needed.
- The high-multiplier option provides more insurance against the downside risk of the downturn being larger than expected.

*Source: 1nzlea2019002 - Annex V. Fiscal Policy and Downside Risks.*

### Annex VIII. Follow-Up on Key Recommendations of the 2017

### Annex VIII. Follow-Up on Key Recommendations of the 2017 FSAP

### Financial Stability and Financial Sector Resilience
- Recommendation: Increase RBNZ resources for the supervision and regulation of banks, insurance companies, and FMIs.  
  - Time Frame: ST  
  - Update and Implementation: In process. RBNZ has been bringing on board additional staff. Phase 2 Review of the RBNZ Act examines options on funding.

- Recommendation: Strengthen cooperation and collaboration arrangements with Australian authorities.  
  - Time Frame: ST  
  - Update and Implementation: In process. Ongoing interaction, completed a hypothetical bank crisis simulation exercise in September 2017, follow-up exercise on communications coordination being planned. Phase 2 Review of the RBNZ Act will also consider coordination arrangements.

- Recommendation: Clarify responsibilities of the Treasury and RBNZ on financial sector issues to reinforce the role of RBNZ as prudential regulator and supervisor.  
  - Time Frame: ST  
  - Update and Implementation: In process. Governance and prudential regulation options are examined in Phase 2 Review of the RBNZ Act.

- Recommendation: Issue enforceable standards on key risks, governance, risk management, and controls to make RBNZ’s supervisory expectations more transparent and support supervisory preventive action.  
  - Time Frame: ST  
  - Update and Implementation: In process. Phase 2 Review of the RBNZ Act examines options on supervision and enforcement.

- Recommendation: Review and extend the enforcement regime to promote preventive action and enhance sanctions powers, including by eliminating ministerial consent for directions, and making compliance with RBNZ policy documents evidence of prudent practice.  
  - Time Frame: MT  
  - Update and Implementation: In process. Phase 2 Review of the RBNZ Act examines options on supervision and enforcement.

- Recommendation: Initiate on-site programs to test the foundation of the three-pillar approach and directors’ attestations and increase supervisory engagement with institutions in order to require appropriate action.  
  - Time Frame: ST  
  - Update and Implementation: In process. A team has been formed to undertake cross-cutting review. Phase 2 Review of the RBNZ Act is considering empowering the Reserve Bank to undertake some form of on-site inspections.

- Recommendation: Refine Financial Markets Authority (FMA) supervision by:  
  a) direct monitoring of aspects of asset management relevant to financial stability;  
  b) ensuring quality of Financial Markets Supervisors; and  
  c) enhancing insurance intermediary and conduct regulation and supervision.  
  - Time Frame: I (for heading) / various items in process.  
  - Update and Implementation:  
    - a) In process. The FMA has completed a valuation thematic and has planned redemption/liquidity stress testing for late 2019.  
    - b) In process. The FMA continue to have extensive ongoing engagement with the six licensed supervisors. The FMA conducted a thematic review of supervisory processes in 2018.  
    - c) In process. A public consultation of New Zealand’s insurance contract law review closed in end-June.

- Recommendation: Expand the FMA's regulatory perimeter to include licensing and supervision of custodians and appropriate oversight of wholesale asset managers.  
  - Time Frame: ST  
  - Update and Implementation: In process. The FMA has received its outsourced thematic on custodial arrangements and is progressing work to consider whether there is a case for recommending the establishment of a regulatory regime for custodians.

- Recommendation: Adopt and implement proposed Financial Market Infrastructures (FMI) legislation on regulation, oversight, and enforcement powers.  
  - Time Frame: I  
  - Update and Implementation: In process. In April 2017, the Government agreed to adopt an enhanced legislative framework for the regulation of FMIs. An exposure draft of the proposed legislation was published on August 1, 2019 and the legislation is due to be introduced into Parliament by the end of the year.

- Recommendation: Adopt the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) through detailed requirements in secondary legislation; change the frequency of FMI self-assessments in the proposed regime from three to two years; and enhance compliance of the designated FMIs with PFMI requirements.  
  - Time Frame: ST  
  - Update and Implementation: In process. The proposed legislation will provide the ability for the PFMI to be implemented via standards prescribed in secondary legislation. The frequency of FMI self-assessments may be changed from three to two years once the new legislation is in force.

- Recommendation: Ensure that designated nonfinancial businesses and professions are subject to AML/CFT requirements, particularly company service providers, lawyers, and accountants.  
  - Time Frame: MT  
  - Update and Implementation: Done. The AML/CFT Amendment Act 2017, which extends the coverage of the AML/CFT laws, has come fully into effect. The legislation now covers lawyers, conveyancers and businesses that provide trust and company services (from July 1, 2018); accountants (from October 1, 2018); and real estate agents (from January 1, 2019).

- Recommendation: Expand data collection and modeling efforts to develop structural models for credit risk in commercial real estate (CRE) and corporate portfolios.  
  - Time Frame: MT  
  - Update and Implementation: In process. Current focus is on embedding stress testing within the prudential framework. Consideration of enhancements will follow.

### Macroprudential Framework
- Recommendation: Strengthen arrangements for macroprudential policy by increasing communication efforts; by increasing the transparency of the process to adjust the framework; and by maintaining an accountability framework that does not jeopardize the integrity and independence of the macroprudential decision-making process.  
  - Time Frame: C  
  - Update and Implementation: In process. The RBNZ has published a review of experience with its loan-to-value ratio policy and provided more clarity on the purpose and strategy for using macroprudential tools. Phase 2 Review of the RBNZ Act examines the role the RBNZ should have in macro-prudential policy, including the tools available, and whether special governance arrangements should apply when using these tools.

- Recommendation: Introduce DTI measures in the macroprudential toolkit.  
  - Time Frame: I  
  - Update and Implementation: In process. The RBNZ conducted a public consultation in June-August 2017 on the possible addition of serviceability restrictions to the macroprudential toolkit. The role of DTI measures is included in Phase 2 Review of the RBNZ Act.

- Recommendation: Implement DTI measures if the changes to the LVR do not reduce the risks in the housing sector.  
  - Time Frame: I  
  - Update and Implementation: The authorities do not need to pursue this recommendation at present as housing risks continue to moderate.

- Recommendation: Increase capital buffer requirements to reflect the concentration of the financial sector in four banks.  
  - Time Frame: I  
  - Update and Implementation: In process. A public consultation on the RBNZ’s proposed increase in capital adequacy requirement for locally incorporated registered banks is currently underway, decisions are expected by end-November 2019.

### Crisis Readiness, Management, and Resolution
- Recommendation: Strengthen domestic crisis management arrangements by reaching ex ante agreement on roles, responsibilities, and processes; prepositioning, mobilization, logistics, and communications plans; and testing through simulation exercises.  
  - Time Frame: MT  
  - Update and Implementation: In process. Phase 2 Review of the RBNZ Act examines options to enhance the crisis management regime, most of which have been developed with reference to the 2017 FSAP recommendations.

- Recommendation: Reconsider the merits of deposit insurance, or in the absence of policy support, introduce a limited depositor preference to provide legal certainty for the de minimis exemption in OBR.  
  - Time Frame: MT  
  - Update and Implementation: Partially done. In-principle decision to adopt a deposit insurance framework was announced in June 2019, as a part of the Phase 2 Review of the RBNZ Act.

- Recommendation: Revise the RBNZ Act to provide greater clarity and certainty in resolution, by inserting objectives in resolution including protection of depositors and the public interest and requiring accountability reporting against these objectives; by clarifying that the RBNZ is the sole resolution authority and inserting an express requirement for ministerial consent for resolutions with fiscal or systemic implications only.  
  - Time Frame: MT  
  - Update and Implementation: In process. Phase 2 Review of the RBNZ Act examines options to enhance the crisis management regime, most of which have been developed with reference to the 2017 FSAP recommendations.

*Source: Annex VIII. Follow-Up on Key Recommendations of the 2017 FSAP, IMF staff compilation.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1nzlea2019002.pdf_