## 1ausea2020001 - 2. Reflects the national accounts measure of household debt, including to the financial sector, state and federal govern

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### Key issues, context, and summary findings
- Macroeconomic fundamentals and performance
  - Growth remains below potential and inflation is slightly below its target range.
  - Productivity growth has slowed down; business investment and R&D spending weakened.
  - Australia has substantial exposure to China; subdued global growth and U.S.-China tensions pose external headwinds.
- Household balance sheet and housing
  - The 2012‑17 housing boom resulted in household debt as high as 185 percent of disposable income.
  - House prices rose rapidly from 2012 to mid-2017, declined through mid-2019, and recovered partly since June 2019.
- Banking sector and resilience
  - Major banks’ common equity Tier 1 capital ratio averaged 11 percent in September 2019.
  - Offshore wholesale funding accounted for about 20 percent of banks’ total funding.
- Policy environment
  - Inflation targeting, prudent fiscal policy, and exchange rate flexibility underpin the economy.
  - Authorities lack a national integrated approach to climate change mitigation.

*February 6, 2020 — AUSTRALIA STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION*

### Recent developments and near-term outlook
- Demand and output
  - GDP growth recovered to 2.1 percent (q/q, saar) on average in 2019Q1‑Q3 from 2018H2 lows.
  - Recovery supported by strong public demand and net exports; domestic private demand remained weak.
- Labor market and prices
  - Unemployment rate: 5.1 percent in December 2019; NAIRU estimated at 4.8 percent.
  - Underemployment remained high; wage growth at 2.2 percent (y/y) in 2019Q3; employment growth at 2.3 percent (y/y) in 2019.
  - Headline and underlying inflation around 1¾ percent (y/y) in 2019Q2‑Q4, below the RBA’s 2–3 percent target range.
- Housing and credit
  - Nationwide housing prices in December 2019 up about 8 percent from trough in June 2019 but about 4 percent below peak in September 2017.
  - Housing credit growth slowed to 3.1 percent (y/y) in December 2019.
  - APRA serviceability assessment changes: removal of 7 percent minimum floor since July 2019 and increase in serviceability buffer from 200 basis points to at least 250 basis points (effective rate around 5.5 percent currently).
- Fiscal and monetary stance
  - FY2019/20 consolidated fiscal impulse: 0.2 percent of GDP; combined overall deficit contained at 1 percent of GDP.
  - RBA cash rate cut from 1.5 percent to 0.75 percent across June, July, and October 2019; real policy rate stands at almost -1 percent relative to neutral estimates of 1 to 2 percent.
- Bushfires and coronavirus
  - Ongoing drought and unprecedented bushfires and the coronavirus outbreak have increased downside risks.

### Staff outlook, projections, and key statistics
- Growth and potential
  - Growth projected to recover from 1.8 percent in 2019 to 2 percent in 2020.
  - Medium-term potential growth about 2½ percent.
- Inflation and output gap
  - Inflation forecast to remain below the target range until 2021.
  - Projected output gap: -1.0 percent of GDP for 2020.
- Household debt and housing
  - Household debt expected to stabilize at around 185 percent of disposable income in 2019 and decline gradually thereafter.
  - Housing prices expected to stabilize in real terms supported by population growth and easing financial conditions.
- External balances
  - Current account projected surplus of 0.4 percent of GDP in 2019; projected to post a deficit of -0.4 percent of GDP in 2020 as terms‑of‑trade surge unwinds.
- Selected macroeconomic indicators (excerpt)
  - Real GDP (annual percent change) series includes: 2.3; 2.8; 2.5; 2.7; 1.8; 2.0; 2.4; 2.5; 2.6; 2.6; 2.6.
  - Unemployment (percent of labor force) series includes: 6.1; 5.7; 5.6; 5.3; 5.2; 5.2; 5.2; 5.1; 5.0; 4.9; 4.8.
  - Household debt (percent of disposable income) series includes: 173; 180; 187; 187; 185; 183; 181; 178; 175; 172; 170.
  - Nominal GDP (bn A$) series includes: 1,641; 1,703; 1,808; 1,899; 1,995; 2,060; 2,127; 2,209; 2,314; 2,427; 2,547.

### Risks (tilted to the downside) and scenarios
- External risks
  - Deep downturn in China; renewed escalation of China‑U.S. tensions; prolonged travel disruptions from coronavirus; sharp tightening of global financial conditions.
- Domestic risks
  - Weaker private consumption from cooling labor market; worsening bushfires affecting agriculture, consumption, and tourism; rapid housing market recovery adding to medium‑term macrofinancial vulnerabilities.
- Regional spillovers from U.S.-China tensions (selected impacts)
  - China: largest impact on real GDP of -1.2 percent relative to April 2018 WEO by 2020 (Year 3).
  - United States: impact on real GDP of -0.5 percent by 2020 (Year 3).
  - Australia: impacts relatively limited in the tariff scenario shown; real effective exchange rate would depreciate by 0.4 percent by 2023 (Year 6) under falling demand from China.

### Policy recommendations — macroeconomic stance
- Overall
  - Keep macroeconomic policy mix accommodative given below‑potential growth, weak inflation expectations, and global downside risks.
  - Authorities should be ready for a coordinated response if downside risks materialize.
- Fiscal policy
  - FY2019/20 expansionary stance appropriate; reconsider planned consolidated contraction in FY2020/21.
  - States should attempt to maintain current level of infrastructure spending as a share of GDP.
  - Use temporary measures if needed: buttress infrastructure pipelines, tax breaks for SMEs, bonuses for retraining and education, or cash transfers to households.
  - Delay implementation of budget repair (targeting a surplus of at least 1 percent of GDP) if stimulus is necessary.
- Monetary policy
  - Remain accommodative; further data‑dependent easing appropriate.
  - If the cash rate reaches the effective lower bound, consider unconventional monetary policy (UMP) such as:
    - quantitative easing through government debt purchases;
    - mildly negative policy rates;
    - targeted conditional lending operations to banks;
    - stronger forward guidance (calendar- and/or outcome-based).
  - Focus UMP on short end of yield curve given mortgages and corporate lending are anchored to variable short-term rates.
- Contingency planning
  - Commonwealth and state governments have substantial fiscal space and should prepare contingency stimulus packages.

### Policy recommendations — financial sector resilience and macroprudential
- Bank resilience and supervision
  - Support APRA plans to enhance banks’ capital framework and loss‑absorbing capacity; four major banks expected to maintain total capital ratio around 17½ percent after TLAC uplift.
  - Encourage banks to lengthen maturity structure of wholesale funding to mitigate liquidity and rollover risks.
  - Implement Hayne Royal Commission recommendations and APRA Capability Review improvements.
- Macroprudential toolkit
  - Current stance appropriate but should be ready to tighten if financial risks increase.
  - Ensure easing of thresholds and serviceability recalibrations do not lead to renewed high‑risk lending.
  - Prepare for possible introduction of LVR and debt‑to‑income (DTI) limits, and consider a sectoral CCyB targeting housing exposures in case of rapid housing credit upswing.
  - Strengthen transparency and public communication on macroprudential policy.
- Crisis management and AML/CFT
  - Complete resolution policy framework; expedite development of bank‑specific resolution plans and statutory bail‑in powers.
  - Strengthen AML/CFT supervision: improve data collection, risk analysis, oversight, and expand coverage to DNFBPs (real estate agents, lawyers, trust and company service providers).

### Housing supply, taxes, and structural reforms
- Housing supply and affordability
  - Housing supply reforms critical: more efficient long‑term planning, zoning, local government reform, and infrastructure development (e.g., City and Regional Deals).
- Housing tax policy
  - Transition from housing transfer stamp duty to a general land tax to improve efficiency, labor mobility, and revenue stability.
  - Consider complementary reforms to reduce incentives for leveraged household investment (e.g., limiting negative gearing) while phasing major changes gradually.
  - Prefer non‑discriminatory measures (e.g., surcharge on vacant property or on all investor-owned housing transactions) over discriminatory foreign purchaser duties.
- Broader structural reforms to boost inclusive growth
  - Strengthen investment environment and innovation capacity; relieve SME financing constraints; improve government R&D support targeting younger firms.
  - Increase full‑time female employment and reduce youth underemployment via tax, transfer, and childcare policy adjustments.
  - Shift further from direct to indirect taxes (broaden GST base; reduce statutory CIT rate for large firms) while addressing distributional consequences with targeted cash transfers.
- Climate policy
  - Develop an ambitious national integrated approach to energy and climate mitigation to meet Paris Agreement goals (26–28 percent below 2005 levels by 2030).
  - Staff favors price‑based measures where feasible; if politically infeasible, consider alternatives (e.g., “feebate system” in power generation).

### Financial stability, macroprudential chronology, and DSA highlights
- Macroprudential measures (selected timeline)
  - Dec 2014: investor lending speed limit, 7 percent serviceability floor, interest‑rate buffers of at least 2 percentage points.
  - Mar 2017: limit interest‑only lending flow to 30 percent of new residential mortgage lending; strict limits on high‑LVR interest‑only loans.
  - Jul 2019: removal of 7 percent serviceability floor and increase serviceability buffer to at least 2.5 percentage points over loan rate.
- Debt Sustainability Analysis (baseline excerpts)
  - Nominal gross public debt (percent of GDP) series (selected): 27.0; 41.1; 41.5; 42.2; 42.9; 42.9; 42.4; 41.0; 39.5.
  - NIIP: –49.1 percent of GDP in 2019; Gross Assets: 152.3 percent of GDP; Gross Liab.: 201.4 percent of GDP.
  - Staff‑adjusted CA gap midpoint: 0.3 percent of GDP for 2019 after adjustments.

### Bushfires, agriculture, and near‑term shocks (Box 1)
- As of January 22, 2020: 10.4 million hectares burned in 2019‑20 bushfire season.
- Reported casualties and damage to date:
  - 29 people killed.
  - Nearly 2,900 homes destroyed.
  - A$1.3 billion in insurance claims filed (almost 0.1 percent of GDP).
- Agricultural impacts over 2019Q1‑Q3:
  - Agriculture‑related output dropped by 9 percent from same period last year.
  - Cereal exports dropped by 33 percent from same period last year.
- Staff projection: continued weakness in agriculture could shave off about 0.1‑0.2 percentage points from annual GDP growth in 2020.
- Government assistance:
  - National Bushfire Recovery Agency: A$2 billion over 2020 and 2021 (0.1 percent of GDP).
  - New South Wales package: A$1 billion for rebuilding infrastructure.
  - Commonwealth disbursement in January 2020: over A$60 million to local governments.

### Consultation cycle recommendation
- IMF staff recommends next Article IV consultation on the standard 12‑month cycle.

*Source: International Monetary Fund staff report for the 2019 Article IV Consultation — Australia (February 6, 2020). *

### 2. Reflects the national accounts measure of household debt, including to the financial sector, state and federal govern

### 1ausea2020001 - 2. Reflects the national accounts measure of household debt, including to the financial sector, state and federal govern

### KEY ISSUES
- Context
  - Despite sound macroeconomic fundamentals and policy management, growth remains below potential and inflation is slightly below its target range.
  - Australia has not experienced a major impact from declining global trade in the wake of the U.S.-China tensions, but subdued global growth prospects pose a challenge, especially given Australia’s significant exposure to China.
  - Productivity growth has slowed down.
- Outlook and risks
  - Growth is projected to recover gradually in the near term, supported by monetary policy easing, tax cuts, and the recovery of housing markets.
  - Inflation is forecast to remain slightly below the target range until 2021 due to persistent economic slack.
  - Downside risks include a renewed escalation of the China-U.S. tensions and weaker private consumption; these risks have increased recently due to the widespread bushfires and the coronavirus outbreak.
  - On the upside, looser financial conditions could re-accelerate asset-price inflation, boosting private consumption but also adding to medium-term vulnerabilities.
- Policy recommendations
  - Macroeconomic policy mix should remain accommodative; continued monetary policy easing may be helpful depending on incoming data.
  - Fiscal policy is appropriately expansionary in FY2019/20 but the planned contraction in FY2020/21, driven by lower state-level infrastructure spending, should be avoided.
  - Authorities should be ready for a coordinated response if downside risks materialize.
  - Macroprudential policy should stand ready to tighten in case of renewed overheating of housing markets; currently set appropriately but targeted macroprudential policies could become warranted.
  - Step up structural reforms to support strong and inclusive growth: foster business investment and innovation, promote full-time female employment, reduce youth underemployment, pursue tax reforms to shift from direct to indirect taxes, develop a national integrated approach to energy and climate change policies, and pursue housing supply reform to support affordability.

*February 6, 2020 — AUSTRALIA STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION*

### CONTEXT — SUMMARY FINDINGS
- Australia is still recovering from commodity and asset price cycles in the 2010s; macroeconomic adjustment following the 2012-14 mining boom has been prolonged.
- House prices rose rapidly from 2012 to mid-2017 and declined through mid-2019.
- Economy supported by inflation targeting, prudent fiscal policy, and exchange rate flexibility; nevertheless growth remains below potential and inflation has undershot the target range.
- Structural vulnerabilities highlighted:
  - Slower labor productivity growth due to weakening business investment and R&D spending.
  - Banking sector adequately capitalized and sound but partly dependent on wholesale funding and highly exposed to residential mortgage lending.
  - The 2012-17 housing boom resulted in household debt as high as 185 percent of disposable income.
  - Australia has yet to develop a national, integrated approach to climate change mitigation.
- External headwinds: subdued global growth prospects and deteriorating business confidence, with high exposure to China.

### A FRAGILE RECOVERY — RECENT DEVELOPMENTS
- Demand and GDP
  - GDP growth recovered to 2.1 percent (q/q, saar) on average in 2019Q1-Q3 from the lows in the second half of 2018.
  - Recovery supported by strong public demand (infrastructure spending, NDIS rollout) and substantial contribution from net exports.
  - Domestic private demand remained weak; negative wealth effects from the housing market downturn through mid-2019 likely weighed on private consumption.
  - Mining investment started bottoming out but did not offset contraction in residential investment since late 2018 and weakening non-mining business investment.
  - Ongoing drought and unprecedented bushfires negatively affecting economic activity, while effects on growth have been limited so far (Box 1).
- Labor markets
  - Unemployment rate declined to 5.1 percent in December 2019; NAIRU estimated at 4.8 percent.
  - Underemployment rate remained high, indicating persistent labor market slack.
  - Wage growth at 2.2 percent (y/y) in 2019Q3.
  - Employment growth at 2.3 percent (y/y) in 2019.
  - Job vacancies and advertisements started to ease, indicating cooling momentum in labor demand.
- Prices
  - Headline and underlying inflation dropped to around 1¾ percent (y/y) in 2019Q2-Q4, below the RBA’s target range of 2-3 percent.
  - Subdued price increases in housing-related items and utilities offset a small pickup in tradable inflation due to exchange rate depreciation.
  - Fresh food prices rose in 2019Q4, likely reflecting the impact of the drought on supply.
- External position
  - Current account (CA) improved since mid-2018 and is expected to have recorded a surplus of 0.4 percent of GDP in 2019.
  - Preliminary CA gap for 2019 estimated at 0.3 percent of GDP.
  - CA balance projected to post a deficit of 0.4 percent of GDP in 2020 as the terms-of-trade surge unwinds.
- Housing markets
  - Nationwide housing prices in December 2019 up about 8 percent from trough in June 2019 but about 4 percent below peak in September 2017.
  - Home sales in December about 19 percent below their 2017 average.
  - Housing credit growth slowed to 3.1 percent (y/y) in December.
  - Past declines in residential housing approvals suggest a continuing decline in residential construction, indicating upside risks to prices in context of normalizing demand.
  - Policy changes contributing to demand and prices: resolution of uncertainty regarding tax incentives; APRA recalibration of serviceability assessments (see note); interest rate cuts.
    - Since July 2019, APRA removed the requirement for residential mortgage serviceability to be evaluated with a minimum interest rate of at least 7 percent but raised the interest rate buffer over the loan’s interest rate to at least 250 basis points from 200 basis points, bringing the effective rate for such evaluations to about 5.5 percent currently.
- Banking sector
  - Major banks’ common equity Tier 1 capital ratio averaged 11 percent in September 2019, above the 10.5 percent "unquestionably strong" threshold required by January 1, 2020.
  - Non-performing loan ratio at 1 percent in September 2019.
  - Offshore wholesale funding accounted for about 20 percent of banks’ total funding.
  - Banks’ earnings declined amid slower credit growth and increased remediation and compliance costs.
- Fiscal and monetary policy
  - FY2018/19 fiscal outturn tighter than expected; FY2019/20 budgets more expansionary.
  - FY2019/20 Commonwealth and state budgets imply a fiscal impulse of 0.2 percent of GDP; combined overall deficit contained at 1 percent of GDP.
  - RBA cut policy rate from 1.5 percent to 0.75 percent in June, July, and October 2019.
  - RBA indicated an accommodative bias and need for an extended period of low interest rates.
  - Domestic financial conditions loosened; long-term treasury bond yields declined to historic lows.
  - Business credit growth remained subdued.

### OUTLOOK (STAFF PROJECTIONS AND ASSUMPTIONS)
- Growth projections
  - Growth projected to recover from 1.8 percent in 2019 to 2 percent in 2020.
  - Over the medium term, growth is forecast to reach staff’s estimate of potential growth of about 2½ percent.
  - Recovery drivers: monetary policy easing, PIT cuts, house price recovery, incipient recovery in mining investment.
  - Drags on growth: residential investment, slower non-mining business investment, weakening demand from China, impact of drought and bushfires, limited effects of coronavirus outbreak.
- Inflation and output gap
  - Inflation forecast to stay below target range until 2021.
  - Projected output gap at -1.0 percent of GDP for 2020.
- Housing and household debt
  - Housing prices expected to stabilize in real terms.
  - Underlying demand for housing supported by robust population growth, easing financial conditions, and a small improvement in housing affordability.
  - Household debt should stabilize at around 185 percent of disposable income in 2019 and decline gradually in coming years because of moderate increases in disposable income.
- External balances
  - Net exports to contribute less to growth given completion of mining export ramp-ups and weakening Chinese demand.

### RISKS (TILTED TO THE DOWNSIDE)
- External risks
  - Deep downturn in China could reduce commodity and services exports.
  - Spillovers from renewed escalation of China-U.S. tensions depend on commodity price reactions and China’s policy response, particularly public investment linked to imports of iron ore and coal.
  - Phase I trade deal could imply downside risks for Australian exports to China through trade diversion depending on execution of managed trade component.
  - Prolonged travel disruptions from the coronavirus outbreak could drag on tourism exports.
  - Sharp tightening of global financial conditions could squeeze banks’ wholesale funding, raising borrowing costs domestically.
- Domestic risks
  - Private consumption could weaken if a cooling labor market squeezes household income.
  - Worsening bushfires could affect consumption and tourism in affected urban areas and rural agriculture.
  - Looser financial conditions could re-accelerate asset-price inflation (including housing), boosting consumption but adding to medium-term vulnerabilities given high household debt levels.

### AUTHORITIES’ VIEWS
- Authorities projected growth to reach 2¼ percent in FY2019/20 and 2¾ percent in FY2020/21 (as of early December), higher than staff projections.
- Expected drivers of household consumption pickup: personal income tax relief, continued strong employment growth, recent monetary policy easing, recovery in the established housing market.
- Expected business investment contribution to growth due to strong corporate balance sheets and a pickup in mining investment.
- Public demand expected to continue supporting growth via spending on education, healthcare, infrastructure, and NDIS roll-out.
- Authorities expected labor market slack to diminish gradually and inflation to increase toward the target range.

*Source: International Monetary Fund staff report for the 2019 Article IV Consultation — Australia (February 6, 2020).*

### 13.      Risks to the outlook were seen as balanced, especially beyond the near term. In the

### 13.      Risks to the outlook were seen as balanced, especially beyond the near term. In the

### Risks and near-term uncertainties
- Escalation or de-escalation of the U.S.-China trade and technology tensions remained a large uncertainty for global growth and could spill over to Australia.
- China’s slowing growth trajectory and the interaction of Chinese domestic policies and external pressures posed risks to demand for bulk commodities and Australia’s terms of trade.
- Ongoing domestic shocks:
  - Drought and unprecedented bushfires were still unfolding and posed uncertain downside risks.
  - The recent coronavirus outbreak posed additional downside risk.
- Domestic demand and housing risks:
  - Private consumption could remain weak if consumers opt to save gains in disposable income from high employment growth, personal income tax cuts, and lower mortgage costs.
  - The expected turnaround in residential investment in late 2020 could be delayed by longer-than-expected lead times for high-density dwelling construction.
  - A rapid recovery in the housing market is a key upside risk that could boost private consumption and residential investment beyond the near term but could also add to medium-term macrofinancial risks.

### Supporting the recovery with accommodative macroeconomic policies — Context
- Consolidated fiscal stance:
  - Expansionary for FY2019/20 but expected to be contractionary in FY2020/21.
  - Commonwealth fiscal support near term via legislated PIT and CIT cuts and additional infrastructure spending, consistent with the Commonwealth government’s commitment of raising its 10-year cumulative infrastructure spending from A$75 billion to A$100 billion.
  - State-level fiscal policy expected to be contractionary from FY2020/21 as infrastructure investment as a share of GDP is expected to decline.
- Monetary policy and inflation expectations:
  - Following recent rate cuts, the real policy rate stands at almost -1 percent relative to estimates of the real neutral rate in the range of 1 to 2 percent.
  - Market-based inflation expectations have dipped below 2 percent for the first time since 2016.

### Supporting the recovery with accommodative macroeconomic policies — Staff’s views (policy recommendations)
- Overall policy mix:
  - Should remain accommodative given below-potential growth, weakening inflation expectations, and continued global downside risks.
  - Authorities should be ready to respond if downside risks materialize via:
    - (i) additional fiscal policy stimulus to avoid over-burdening monetary policy;
    - (ii) further monetary easing, likely including unconventional monetary policy (UMP) measures as the cash rate is close to the effective lower bound (ELB);
    - (iii) targeted macroprudential measures to arrest buildup of any pockets of vulnerability from loose financial conditions in the context of UMP.
- Fiscal stance:
  - Consolidated contractionary stance in FY2020/21 should be reconsidered as it could put the incipient recovery at risk while growth remains below potential and labor market slack persists.
  - States should attempt to at least maintain their current level of infrastructure spending as a share of GDP.
  - Spending should be flexible to accommodate additional costs for response and recovery from the bushfires.
- Monetary policy:
  - Should remain accommodative for the foreseeable future.
  - The 75 basis point policy rate cuts during 2019 were appropriate to support domestic demand and inflation.
  - If high-frequency data continue to support below-potential growth and weakening inflation expectations, additional policy easing will be appropriate.
- Fiscal space and contingency measures:
  - Both Commonwealth and state governments have substantial fiscal space and should be prepared to provide additional stimulus if downside risks materialize.
  - Temporary measures that could be enacted include further buttressing infrastructure pipelines, tax breaks for SMEs, bonuses for retraining and education, or cash transfers to households.
  - If stimulus is necessary, implementation of the budget repair (deliver a budget surplus of at least 1 percent of GDP as soon as possible) should be delayed, as permitted under the Commonwealth’s medium-term fiscal strategy.
- Unconventional monetary policy (UMP) options if downside risks materialize:
  - Focus on measures that affect the short end of the yield curve because Australia’s mortgages and corporate lending are anchored to variable short-term interest rates.
  - Main policy options include quantitative easing through purchases of government debt securities, mildly negative policy rates, and targeted conditional lending operations to banks.
  - Stronger forward guidance employing calendar- and/or outcome-based guidance on future policy actions.

### Supporting the recovery with accommodative macroeconomic policies — Authorities’ views
- Commonwealth government:
  - Would continue planned near-term fiscal consolidation provided baseline growth forecasts come to pass.
  - Did not see a case for near-term fiscal stimulus given expectation of growth returning to potential.
  - Expected to deliver a surplus in its underlying cash balance, but not at the expense of funding bushfire recovery.
- States:
  - Planned to continue consolidating fiscal positions where possible.
- Infrastructure:
  - Spending expected to remain strong; authorities concerned about capacity constraints slowing pace and increasing cost.
  - Increasing coordination across Commonwealth, state and local levels, and use of public-private partnerships.
- Reserve Bank of Australia (RBA):
  - Prepared to provide more monetary stimulus if needed.
  - Noted that impacts from last year’s rate cuts had not yet fully materialized given long and variable lags of monetary policy.
  - Expected remaining space for conventional policy would likely provide sufficient scope for support as needed, with inflation expected to return to the target range by late 2021.
- Combined response in a severe negative shock:
  - Authorities agreed a severe negative shock might require combined fiscal and monetary response.
  - Commonwealth fiscal cash surplus priority could be reconsidered in a downside scenario materially changing baseline assumptions.
  - UMP may be required given the RBA’s cash rate is close to the lower bound.
  - Negative interest rates were viewed as a very unlikely choice in Australia’s context.

### Enhancing financial sector resilience — Context and recent measures
- Macroprudential policy:
  - Tightening over 2014–17 helped address high-risk mortgage lending; easing during the housing downturn did not lead to deterioration.
  - Outstanding share of investor loans at 32 percent and interest-only loans at 20 percent, well below peaks close to 40 percent in around 2015.
  - Loans with loan-to-value ratios (LVRs) above 80 percent stabilized at 23 percent in September 2019.
- Bank capital framework:
  - APRA announced in July 2019 requirement for domestic systemically-important banks (D-SIBs) to strengthen total loss-absorbing capacity (TLAC) by lifting total capital by 3 percentage points of risk-weighted assets by January 1, 2024.
  - With this, the four major banks will be expected to maintain a total capital ratio of around 17½ percent.
  - APRA has proposed revisions to banks’ capital framework to make capital more sensitive to asset riskiness and to reduce concentration of residential mortgages on banks’ balance sheets.
  - APRA indicated likelihood of setting a countercyclical capital buffer (CCyB) at non-zero default level.
- High-LVR new housing loan approvals (ADI data):
  - Distribution shown across LVR bands (percent): LVR≤60%, 60%<LVR≤80%, 80%<LVR≤90%, LVR≥90% (chart data presented in source).

### Enhancing financial sector resilience — Staff’s views (policy recommendations)
- Bank resilience:
  - Australian banks remain adequately capitalized and profitable but vulnerable due to high household debt, exposure to residential mortgage lending, and dependence on wholesale funding.
  - Support authorities’ plan to further enhance banks’ capital framework to strengthen loss-absorbing capacity.
  - Encourage banks to further lengthen maturity structure of wholesale funding to mitigate structural liquidity risks.
- Macroprudential stance:
  - Remains appropriate but should be ready to tighten if financial risks increase.
  - Authorities should ensure easing of macroprudential thresholds on investors and interest-only loans and recalibration of mortgage serviceability assessments do not lead to renewed high-risk lending.
  - APRA should expand and improve readiness of macroprudential toolkit to allow flexible, targeted responses to persistent and new systemic risks, including preparations for introducing LVR and debt-to-income (DTI) limits, and possibly a sectoral CCyB targeting housing exposures in the event of a rapid housing credit upswing.
  - Staff concurs with APRA Capability Review recommendation to strengthen transparency and public communication on macroprudential policy.
- Regulatory and supervisory reforms:
  - Continue strong reform efforts to implement Hayne Royal Commission (HRC) recommendations by end-2020 to expand consumer protection, enhance governance and accountability, and strengthen regulator effectiveness.
  - Implement APRA Capability Review recommendations to strengthen APRA’s resources and operational flexibility.
- Financial Sector Assessment Program (FSAP) follow-up:
  - Continue implementation of 2018 FSAP recommendations, prioritizing systemic risk oversight, crisis management arrangements, completion of the resolution policy framework, expedited development of bank-specific resolution plans, and introduction of statutory powers for bail-in.
- Anti-money laundering and counter-terrorist financing (AML/CFT):
  - Strengthen AML/CFT supervision by improving data collection and risk analysis, increasing oversight of control and compliance, and undertaking more formal enforcement action for breaches.
  - Expand coverage of AML/CFT regime to include non-financial and business professionals with higher ML/FT risks, including real estate agents, lawyers, and trust and company service providers.

### Enhancing financial sector resilience — Authorities’ views
- Macroprudential vigilance:
  - Authorities agreed macroprudential policy was currently adequate but vigilance was required against a possible renewed housing surge.
  - Focused on buttressing D-SIBs’ loss-absorbing capacity and strengthening banks’ capital framework.
- Wholesale funding maturity:
  - Authorities noted extending maturity of foreign wholesale funding could reduce roll-over risks but raised hedging difficulties for exchange rate risk.
- FSAP implementation progress:
  - Progress on implementing 2018 FSAP recommendations: stronger banking and insurance supervision via enforcement and penalty powers for ASIC, new APRA approaches, and supervisory stress testing.
  - Improved transparency of the Council of Financial Regulators (CFR) and efforts to improve data capability to facilitate financial stability analysis, including stress testing.
  - Continued work on recovery and resolution planning through CFR and with New Zealand counterparts.
- AML/CFT:
  - A bill in Parliament expected to strengthen the regime and address barriers to prosecution, with increased funding for AUSTRAC to expand risk assessment.

### Navigating the swift recovery in housing markets — Context
- Housing price dynamics:
  - Fast increase in housing prices since mid-2019 has partly undone earlier price declines.
  - Despite lower mortgage rates, there has been only a limited improvement in housing affordability for many households since the peak in housing prices in 2017.

### Navigating the swift recovery in housing markets — Staff’s views (policy recommendations)
- Housing supply reforms:
  - Critical for restoring affordability.
  - Recommend more efficient long-term planning, zoning, and local government reforms that promote housing supply growth, along with a focus on infrastructure development to meet needs of a growing urban population.
  - Initiatives such as “City and Regional Deals” that integrate transport, housing and land use policies to coordinate action and maximize the value of infrastructure investment should help meet growing demand for housing.

*Source: IMF staff report excerpts from the Australia country report chapter provided in the source content.*

### 36.      Broader tax reforms could reinforce the effectiveness of supply-side measures.

### 36.      Broader tax reforms could reinforce the effectiveness of supply-side measures.

### Housing tax and policy recommendations
- Transitioning from a housing transfer stamp duty to a general land tax would:
  - improve efficiency by easing entry into the housing market;
  - promote labor mobility;
  - provide a more stable revenue source for the states.
- Complementary reforms could reduce structural incentives for leveraged household investment, including limiting negative gearing in residential real estate.
- Major changes affecting investment decisions and underlying demand for housing should be gradual and not undertaken in isolation.
- Replace housing policy measures that discriminate against non-residential buyers (for example, state-level foreign purchaser duty surcharges on residential property) with non-discriminatory measures, such as:
  - a general surcharge on vacant property; or
  - surcharges on all investor-owned housing transactions.
- Footnotes in the source note prior IMF assessments that foreign purchaser duty surcharges were assessed as capital flow management measures (CFMs) and reference legislative changes affecting the Capital Gains Tax (CGT) main residence exemption for foreign residents.

### Authorities’ views on housing risks and policies
- Authorities saw risks from a possible reemergence of rapid housing price growth, driven by:
  - projected strong population growth;
  - ongoing weakness in building approvals following past housing price declines; and
  - tighter credit supply for developers, which could result in a shortage of new housing and renewed rapid housing price growth and stronger growth in household debt.
- Authorities favor facilitating housing supply reforms and improving affordability through programs including:
  - Commonwealth Rent Assistance (CRA);
  - National Housing and Homelessness Agreement (NHHA);
  - First Home Loan Deposit Scheme (loan guarantees for first-time home buyers);
  - City and Regional Deals.
- Authorities view tax policy as not the right tool to address potential speculative behavior, arguing that:
  - negative gearing applies across investments;
  - investments in residential housing are relatively highly taxed;
  - macroprudential policy should be employed as needed.

### Fostering strong, inclusive and sustainable growth — context and staff views
- Key structural weaknesses identified:
  - Declining productivity growth;
  - Sluggish non-mining business investment and weakening R&D investment;
  - Infrastructure pressure from rising population in major cities;
  - A relatively inefficient tax system with a large share of direct taxes;
  - Female employment relatively low compared with other advanced economies and disproportionately part-time; and
  - Persistently high underemployment of about 20 percent for younger Australians.
- Recent policy actions highlighted:
  - Increased public infrastructure spending and a 10-year infrastructure plan in the 2019-20 budget;
  - Personal income tax (PIT) cuts and lower corporate income tax (CIT) rates for SMEs;
  - Deregulation Taskforce, Child Care Subsidy, Mid-Career Checkpoint, reforms to vocational education and training, targeted youth employment initiatives, and R&D tax credit regime reform.
- Staff recommendations to accelerate structural reforms:
  - Continue addressing infrastructure gaps and maintain the ratio of infrastructure investment spending to GDP at the current level into the medium term, at a minimum.
  - Strengthen the investment environment and innovation capacity, including faster implementation of measures in the Australia 2030: Prosperity through Innovation report.
  - Relieve SME financing constraints (Australian Business Securitization Fund, Australian Business Growth Fund) and promote venture capital.
  - Consider targeted investment allowances and improve the effectiveness of government R&D support for younger firms.
  - Increase full-time employment for women and reduce youth underemployment; review taxes, transfers, and childcare support to reduce disincentives for female labor force participation.
  - Pursue ongoing vocational education and training reforms.

### Tax reform priorities and distributional considerations
- Broad fiscal reforms to promote efficiency and inclusiveness:
  - Shift from direct to indirect taxes by:
    - broadening the GST base; and
    - reducing the statutory CIT rate for large firms.
  - Emphasize mitigating adverse distributional consequences by strengthening targeted cash transfers.
  - Strengthen tax incentives targeting new investment and innovation.

### Climate policy and investment implications
- Australia’s Paris Agreement commitment: reduce emissions by between 26 and 28 percent below 2005 levels by 2030.
- Current policy approach:
  - Commonwealth’s Climate Solutions Package (February 2019) aims to meet the 2030 target through financial support for mitigation, greater use of renewables, a renewable energy target, and plans to improve energy productivity.
  - No reliance on price-based measures such as a carbon tax or an emissions trading scheme at the Commonwealth level; states have separate strategies not sufficiently integrated with Commonwealth approaches.
  - Authorities project Australia will meet its 2030 emissions reduction target on current policies relying on a carryover from past overperformance.
- Staff view:
  - Policy uncertainty around climate mitigation (the carryover implies emissions in 2030 are envisaged to be 4 percent below current levels) may hold back business investment.
  - Recommend developing and implementing an ambitious, national, integrated approach with long-term goals and clarified instruments to meet Paris Agreement goals.
  - Note that price-based measures are generally more cost-effective; if politically infeasible, consider alternatives such as a “feebate system” in power generation (sliding scale of fees and rebates by emissions intensity).

### International cooperation and trade
- Staff welcomes authorities’ support to enhance WTO effectiveness and pursuit of the Regional Comprehensive Economic Partnership (RCEP) to liberalize trade, improve quality and environmental standards, and foster labor mobility in Asia and the Pacific.

### Near-term macroeconomic outlook and policy stance
- Economic assessment:
  - Economy in a nascent but fragile recovery with growth below potential, subdued inflation and wage growth, improving current account, and an external position for 2019 broadly in line with fundamentals.
  - Growth expected to recover gradually, supported by monetary easing, tax cuts, an incipient pickup in mining investment, and the bottoming-out of housing markets; underlying inflation likely below target range until 2021.
  - Downside risks elevated and increased recently due to widespread bushfires and the coronavirus outbreak.
- Policy guidance:
  - Near-term macroeconomic policy mix should remain accommodative.
  - Monetary policy: appropriately accommodative, with continued data-dependent easing helpful.
  - Fiscal policy: expansionary for FY2019/20 is appropriate; avoid an expected contractionary consolidated fiscal stance in FY2020/21 and states should attempt to maintain current infrastructure spending as a share of GDP.
  - Authorities should be prepared for coordinated fiscal and monetary response if downside risks materialize. Australia has substantial fiscal space; temporary measures (for example, buttressing infrastructure spending) and delaying budget repair should be considered if stimulus is necessary.
  - Unconventional monetary policy measures such as quantitative easing may become necessary if the cash rate is close to the effective lower bound.

### Financial sector resilience and macroprudential stance
- Financial system:
  - Australian banks remain adequately capitalized and profitable but vulnerable due to high exposure to residential mortgage lending and dependence on wholesale funding.
  - Support for authorities’ plans to enhance banks’ loss-absorbing capacity and implement Hayne Royal Commission recommendations.
  - Encourage lengthening maturity structure of wholesale funding to mitigate liquidity risks.
  - Reform priorities: implement APRA Capability Review recommendations, reinforce financial crisis management arrangements (2018 FSAP), and strengthen the AML/CFT regime.
- Macroprudential policy:
  - Current stance appropriate but should stand ready to tighten if financial risks rise.
  - APRA should improve readiness of macroprudential toolkit and prepare for potential use of loan-to-value and debt-to-income limits, and possibly a targeted countercyclical capital buffer.

### Housing supply and affordability
- Housing supply reforms are critical to restore affordability:
  - More efficient long-term planning, zoning, and local government reform to promote housing supply growth.
  - Focus on infrastructure development, including through City and Regional Deals, to help meet growing housing demand.

*Source: 1ausea2020001 - 36.      Broader tax reforms could reinforce the effectiveness of supply-side measures.*

### 59.      Australia should step up structural reforms toward strong and inclusive growth.

### Australia should step up structural reforms toward strong and inclusive growth

### Structural reform priorities and policy recommendations
- Reduce domestic policy uncertainty to buttress weakening business investment.
- Support SMEs’ access to finance.
- Pursue product market deregulation.
- Introduce well-targeted tax incentives to stimulate investment.
- Promote innovation by:
  - Accelerating skills and education reforms.
  - Further improving the effectiveness of government R&D support.
- Reduce disincentives for female labor force participation to increase full-time female employment.
- Further reforms in vocational training to help reduce youth underemployment.
- Tax policy priorities:
  - Build on recent reforms in personal and corporate income taxes by shifting further from direct to indirect taxes to reduce distortions and promote growth.
  - Offset adverse distributional consequences of a shift from direct to indirect taxes by strengthening targeted cash transfers.
  - Transition from a housing transfer stamp duty to a general land tax.
  - Reduce structural fiscal incentives for leveraged investment by households, including in residential real estate.

### International cooperation and climate policy
- Continue efforts to support international cooperation and tackle climate change.
- Staff welcomes authorities’ support to enhance the effectiveness of the WTO and pursuit of the RCEP to promote economic integration in the Asia and Pacific region.
- Develop an ambitious, national, integrated approach to energy policy and climate change mitigation to meet the Paris Agreement goals to reduce policy uncertainty and catalyze business investment in Australia.

### Consultation cycle recommendation
- It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Bushfires and macroeconomic impact (Box 1)
- As of January 22, 2020, 10.4 million hectares have burned in the 2019-20 bushfire season.
- Casualties and damage reported to date:
  - 29 people killed.
  - Nearly 2,900 homes destroyed.
  - A$1.3 billion (almost 0.1 percent of GDP) in insurance claims filed.
- Over 2019Q1-Q3:
  - Agriculture-related output dropped by 9 percent from the same period last year.
  - Cereal exports dropped by 33 percent from the same period last year.
- Staff projections envisage continued weakness in agriculture to shave off about 0.1-0.2 percentage points from annual GDP growth in 2020.
- Authorities’ assessment: the impact of the bushfires could be about 0.2 percent of GDP over 2019Q4 and 2020Q1, though with significant uncertainty.
- Government assistance:
  - Commonwealth created the National Bushfire Recovery Agency and made available A$2 billion (0.1 percent of GDP) over 2020 and 2021 for affected families, primary goods producers, small businesses, and local governments.
  - New South Wales state government announced a A$1 billion package focused on rebuilding infrastructure.
  - Commonwealth disbursed in January 2020 over A$60 million to local governments.

### Why has wage growth been low? (Box 2)
- Context and facts:
  - Headline unemployment fell from about 6.3 percent in 2015 to 5.1 percent in December 2019.
  - Nominal wage growth has picked up only slightly; real wage growth picked up recently as inflation declined but remains below its historical average.
- Identified drivers of low nominal wage growth:
  - Persistent underemployment (involuntary part-time employees who want to work more hours).
  - Sluggish labor productivity growth.
  - Prolonged adjustment to the mining investment boom.
- Empirical approach and findings:
  - Staff estimated a wage Philips curve by augmenting a standard model containing unemployment and inflation (Galí, 2011) with underemployment (involuntary part-time job ratio), labor productivity, and the terms of trade.
  - The augmented model is able to track the decline in wage growth over 2012-16 and the modest pick-up in recent years.
- Outlook and policy implication:
  - Wage growth is likely to remain low in coming years because of persistently high underemployment, a projected decline in the terms of trade, and sluggish productivity growth.
  - Persistent labor market slack implies weak inflation prospects and warrants an accommodative macroeconomic policy mix in the near term.

### Housing risks, prices, and affordability (Boxes 3 and 4)
- House-Prices-at-Risk (HaR) framework:
  - HaR quantifies expected changes in house prices at a certain percentile in response to changes in pricing factors (financial conditions, overvaluation, capital flows).
  - Conditional on 2019Q4 economic conditions, real house prices in Australia would fall by 4 percent over the next four quarters with a 10-percent likelihood.
  - Since the beginning of 2019, downside risks have been reduced, although some risks remain; upside risks have increased (90th percentile).
  - Downside risks in Sydney and Melbourne remain.
- Affordability and attainable prices:
  - Actual housing prices in December 2019 were about 7 percent higher than attainable under a debt-service-to-income ratio (DSTI) of 25 percent.
  - Gaps are much higher in Sydney and Melbourne, where households would need to be able to carry a DSTI of 40 percent or higher for housing to be attainable.
  - In Perth, affordability has improved with housing prices attainable with a DSTI of below 25 percent.
- Attainable house price estimation assumptions:
  - Attainable prices use household disposable income per capita by fiscal year (end-June), assume each household is made up of two per capita income earners.
  - Affordable housing cost conventional range: DSTI of 25 to 40 percent.
  - Mortgage rate: standard variable rate for owner-occupier (RBA), principal and interest loan of 30-year maturity.
  - Loan-to-value ratio up to 80 percent, with a down payment of 20 percent of the house price in cash.
  - Actual house prices are median value of dwellings in June of each year (except for 2019* where 2019 represents actual house prices in December 2019 and attainable house prices estimated by extrapolating household disposable income per capita in end-December 2019).

### Recent macroeconomic performance, external position, and monetary policy (Figures 1–4)
- Growth and investment:
  - Growth slowed sharply in 2018H2 and recovered only gradually in 2019, bringing year-on-year growth to multi-year lows.
  - The long decline in mining investment has started bottoming out.
  - The recent slowdown was driven by a weakening of domestic private demand, partially offset by strong public demand and net exports.
  - Private consumption slowdown persisted despite personal income tax cuts and the recovery in housing prices; private investment remained subdued.
- Current account and terms of trade:
  - The current account reached a surplus for the first time in 44 years, reflecting strong export growth supported by a pick-up in the terms of trade.
  - Terms of trade: (2016Q3-2017Q2=100; Actual and forecast displayed through 2021 in figures).
  - Commodity export volumes increased further since the end of the mining boom, led by LNG.
- Housing and household balance sheets:
  - Housing affordability improved during the 2017-19 price correction; valuation metrics improved.
  - Australian house prices remain high compared to other AEs; household debt ratios remain among the highest in AEs.
  - Households continue to have sizable mortgage repayment buffers; most household debt is held by higher income households.
- Monetary policy stance:
  - Consumer price inflation remains weak, with tradable and nontradable inflation falling below the 2 percent lower bound.
  - Wage growth is slowing again, driven by labor market slack.
  - The RBA has cut the cash rate three times since June 2019.

*AUSTRALIA — INTERNATIONAL MONETARY FUND*

### 0.75 percent...

### 1ausea2020001 - 0.75 percent...

### Monetary policy, inflation, and yields
- "0.75 percent... making the monetary stance even more accommodative."
- Inflation dynamics:
  - Overall CPI, Nontradables, Tradables and trimmed-mean CPI indicators shown in figures (annual % change).
- Interest rates and yields:
  - Reserve Bank of Australia cash rate (percent, avg): 2.1; 1.7; 1.5; 1.5; 1.2; 0.4; 0.3; 0.5; 1.0; 1.5; 2.0.
  - 10-year treasury bond yield (percent, avg): 2.7; 2.3; 2.6; 2.6; 1.4; 0.5; 0.5; 0.9; 1.4; 1.9; 2.4.
  - Real policy rate (based on trimmed-mean CPI inflation) and Real 1-year OIS rate shown in figures (percent).
  - Australia Commonwealth yield curves (Dec-17, Dec-18, Dec-19) show lower yields across the curve (2 year / 3 year / 5 year / 10 year points shown).

### Public finances and fiscal stance
- Fiscal orientation:
  - "Public Finances Focused on Infrastructure and Lowering Debt"
  - The Commonwealth continues consolidation while States and Territories run small deficits; recent mid-year reviews increased infrastructure investment relative to FY2019/20 budgets.
- Key fiscal aggregates (percent of GDP; Table 2 consolidated general government operations):
  - Revenue: 34.2; 34.8; 34.6; 35.5; 36.0; 35.8; 36.0; 35.9; 35.3; 35.3.
  - Expenditure: 37.2; 37.5; 36.9; 36.6; 36.8; 36.9; 36.6; 36.1; 35.4; 35.2; 35.1.
  - Net lending/borrowing: -2.9; -2.7; -2.3; -1.1; -0.8; -1.0; -0.6; -0.1; 0.0; 0.2; 0.3.
- Government balance sheet (percent of GDP; Table 2):
  - Gross debt: 35.8; 39.5; 41.0; 41.2; 41.7; 43.0; 42.7; 43.0; 41.7; 40.2; 38.7.
  - Net debt: 16.4; 19.0; 18.5; 19.1; 19.8; 20.9; 20.8; 20.1; 19.1; 17.9; 16.7.
  - Net worth: 50.9; 46.0; 50.1; 49.5; 34.9; 42.7; 44.4; 46.4; 47.5; 47.1; 46.6.
- Fiscal indicators and dynamics:
  - Operating balance: -1.7; -1.4; -0.8; 0.5; 1.0; 0.9; 1.4; 1.7; 1.6; 1.7; 1.8.
  - Cyclically adjusted balance (percent of potential GDP): -2.7; -2.4; -2.2; -1.0; -0.7; -0.9; -0.4; 0.0; 0.1; 0.2; 0.3.
  - Fiscal impulse (change in CAB; in percent of potential GDP): -0.1; -0.2; -0.3; -1.2; -0.3; 0.2; -0.4; -0.4; -0.1; -0.1; -0.1.

### Banking system and financial soundness
- Systemic strength and capitalization:
  - "The Banking System Remains Strong" — Australian major banks are highly rated and profitable after higher capital and liquidity requirements.
  - Regulatory capital to risk-weighted assets: 12.4; 13.9; 13.8; 14.7; 14.9; 15.4.
  - Regulatory Tier I capital to risk-weighted assets: 10.7; 11.9; 11.6; 12.5; 12.8; 12.9.
  - Capital to assets: 5.9; 6.0; 6.6; 6.9; 6.9; 7.3.
- Profitability and asset quality (Table 5):
  - Return on assets: 1.2; 1.4; 0.8; 1.2; 1.3; 0.9.
  - Return on equity: 20.8; 23.8; 12.8; 11.6; 16.7; 19.4; 12.0.
  - Nonperforming loans to total gross loans: 1.1; 0.9; 1.0; 0.9; 0.9; 1.0.
  - Nonperforming loans net of loan-loss provisions to capital: 9.8; 7.9; 7.8; 7.3; 7.8; 7.9.
- Funding and lending structure:
  - Banks rely on wholesale funding and lending concentrated in housing.
  - Sectoral distribution of loans to total loans (residents and nonresidents) and deposit patterns shown in figures and tables.

### Financial markets and market perceptions
- Equity and valuation:
  - S&P/ASX 200 accumulation index tracks broadly in line with U.S. equity prices (figures show Jan-2015=100 baseline).
  - Price-to-earnings ratio (ASX 200) shows increasingly rich valuations over the sample.
- Credit risk and market expectations:
  - Credit Default Swap (CDS) spreads for Australian banks declined (five-year, average of four largest banks).
  - Market-implied expected policy rate at next RBA meeting derived from forward curve indicates markets expect policy rates to lower further.
- Bond yields and spreads:
  - Australia Commonwealth debt yields (2-year, 5-year, 10-year) declined to new lows in the sample.
  - Australia sovereign spreads (AUS 5Y spread, AUS 10Y spread over U.S. Treasury yields) moved negative in periods shown.

### External sector, trade links, and spillovers
- Trade composition and partners:
  - Merchandise exports by destination (2018) dominated by China (CHN), Japan (JPN), Korea (KOR), India (IND), Taiwan (TWN), and others (figures list percentage shares by destination).
  - Exports of services include education and tourism; tourism and education exports show significant contributions from China in recent years (figures: "Tourism by China", "Education for China", etc., percent of GDP).
- Balance of payments and external positions (Table 3):
  - Current account (percent of GDP): -4.6; -3.3; -2.6; -2.1; 0.4; -0.4; -1.3; -2.2; -2.6; -2.8; -2.8.
  - Balance on goods and services: -2.3; -0.8; 0.5; 1.2; 3.5; 3.0; 2.0; 1.0; 0.5; 0.3; 0.2.
  - Exports of goods and services (percent of GDP): 19.7; 19.8; 21.4; 23.1; 24.9; 24.4; 23.4; 22.6; 21.9; 21.4; 21.0.
  - Net international investment position (percent of GDP): -56; -57; -54; -54; -49; -48; -48; -48; -49; -49; -50.
  - Gross official reserves (bn A$): 63; 74; 85; 76... (figures indicate series with further entries).
- Financial linkages:
  - Australian banks’ foreign claims have been stable; financial links are strong with New Zealand, the U.S., the U.K., and Asia-Pacific (notably Japan, Singapore, and China).
  - Non-performing assets in banks’ overseas operations are low.

### Macro structure, productivity, and competitiveness
- Productivity and potential:
  - Multifactor Productivity Growth (2010-2018 average vs 2001-2007 average) displayed in figure; Australia’s recent productivity growth is consistent but relatively modest versus peers.
  - Potential output growth series (Table 1): 2.6; 2.5; 2.4; 2.3; 2.2; 2.2; 2.2; 2.3; 2.4; 2.5; 2.5.
- Innovation and infrastructure:
  - Australia lags other advanced economies in R&D spending (Government / Business / University R&D Expenditures (% GDP) shown for latest 2017 vs 2003).
  - Infrastructure investment gaps by type (Airports, Ports, Rail, Telecoms, Water, Road, Electricity) shown as percent of GDP for 2016-40 (Current trends) and 2016-2040 (Investment need).
- Competitiveness and inequality:
  - Global Competitiveness Index components shown (1 to 7 scale).
  - Gini Coefficient (Post Taxes and Transfers), 2016 or latest: Australia placed among listed countries in figure.

### Key macroeconomic indicators (selected from Table 1: 2015–2025 projections)
- Real GDP (annual percent change): 2.3; 2.8; 2.5; 2.7; 1.8; 2.0; 2.4; 2.5; 2.6; 2.6; 2.6.
- Domestic demand (annual percent change): 1.0; 1.8; 3.0; 2.9; 1.1; 1.7; 2.4; 2.5; 2.5; 2.5; 2.5.
- Unemployment (percent of labor force): 6.1; 5.7; 5.6; 5.3; 5.2; 5.2; 5.2; 5.1; 5.0; 4.9; 4.8.
- Consumer prices (avg): 1.5; 1.3; 2.0; 1.9; 1.6; 1.9; 1.9; 2.1; 2.3; 2.5; 2.5.
- House price index (200? base): 131; 141; 148; 140; 144; 149; 154; 159; 163; 168; 173.
- Household debt (percent of disposable income): 173; 180; 187; 187; 185; 183; 181; 178; 175; 172; 170.
- Nominal GDP (bn A$): 1,641; 1,703; 1,808; 1,899; 1,995; 2,060; 2,127; 2,209; 2,314; 2,427; 2,547.

### Monetary and financial sector structure (selected from Table 4)
- Total assets (A$ bn, other depository corporations): 4,023; 4,230; 4,187; 4,406; 4,550; 4,742; 4,943; 5,158; 5,393; 5,640; 5,900.
- Currency and deposits (A$ bn): 275; 310; 255; 306; 377; 389; 402; 417; 437; 458; 481.
- Loans (A$ bn): 2,894; 3,043; 3,100; 3,244; 3,266; 3,377; 3,515; 3,668; 3,845; 4,036; 4,239.
- Credit to the private sector (percent change): 6.8; 5.6; 5.2; 4.7; 2.3; 3.4; 4.3; 4.5; 4.8; 5.0; 5.0.
- Housing credit (percent change): 7.4; 6.3; 6.3; 4.7; 3.1; 4.0; 4.5; 4.5; 4.9; 5.1; 5.2.

*Sources: RBA; Haver Analytics; Commonwealth and State/Territory Treasuries; FY2019/20 budgets and mid-year reviews; IMF, World Economic Outlook; Orbis by Bureau van Dijk; FitchConnect; APRA; Financial Soundness Indicators; Bloomberg; ABS; BIS; OECD; Department of Foreign Affairs and Trade; Trade in Services Australia; and IMF staff estimates and projections.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall assessment
- External position in 2019 is estimated to have been broadly in line with medium-term fundamentals and desirable policies.
- The CA is estimated at a surplus of about 0.4 percent of GDP in 2019, mainly due to a temporary surge in commodity prices, exchange rate depreciation, and weaker domestic demand, and remains broadly in line with medium-term fundamentals and desirable policies.
- Potential policy responses:
  - With below-potential growth, weakening inflation expectations, and continued global downside risks, the policy mix should remain accommodative.
  - Continued data-dependent monetary policy easing will be appropriate to support demand and inflation expectations.
  - The fiscal stance is appropriately expansionary for FY2019/20 but the planned contraction for FY2020/21 should be reconsidered.
  - The authorities should be ready for a coordinated monetary and fiscal policy response if downside risks materialize.
  - Structural reforms should aim at boosting productivity, especially of the non-mining sector.

### Foreign asset and liability position and trajectory
- Background:
  - NIIP: –49.1 percent of GDP in 2019.
  - Gross Assets: 152.3 (percent of GDP).
  - Debt Assets: 67.8 (percent of GDP).
  - Gross Liab.: 201.4 (percent of GDP).
  - Debt Liab.: 125.8 (percent of GDP).
  - Liabilities are largely denominated in Australian dollars; assets are in foreign currency.
  - Foreign liabilities composition: about one-quarter FDI, one-half portfolio investment (principally banks’ borrowing abroad and foreign holdings of government bonds), and one-quarter other investment and derivatives.
  - The NIIP improved by around 4.5 percent of GDP in 2019, driven by the improved CA balance and nominal economic growth.
  - The NIIP-to-GDP ratio is expected to remain around –50 percent of GDP over the medium term.
- Assessment:
  - The NIIP level and trajectory are sustainable.
  - External Stability approach suggests NIIP would be stable at around current levels over the medium term with a CA deficit at around 2.5 percent of GDP.
  - The external balance sheet structure reduces vulnerability from a high negative NIIP: with a positive net foreign currency asset position, a nominal depreciation tends to strengthen the external balance sheet, all else equal.
  - Banking sector’s net foreign currency liability position is mostly hedged.
  - Maturity of banks’ external funding has lengthened since the global financial crisis.
  - In a tail risk event where domestic banks suffer a major loss, the government’s strong balance sheet position allows credible support.

### Current account
- Background:
  - Australia has run CA deficits for most of its history; since the early 1980s deficits averaged around 4 percent of GDP.
  - The CA balance in 2019 improved to a surplus of about 0.4 percent of GDP, reflecting strong iron ore prices and a ramp-up in new resource exports, including liquified natural gas.
  - The CA is expected to return to deficit at around 0.4 percent of GDP in 2020, due to still strong though relatively lower commodity prices.
  - Over the medium term, the CA deficit is expected at a level lower than the historical average, given the end of the prolonged import-intensive mining investment boom and a lower interest differential on Australian bonds relative to foreign bonds compared with longer-term averages.
  - Key risk: a sharper-than-expected slowdown in China leading to further sharp decline in commodity prices.
- Assessment and EBA model results:
  - For 2019:
    - Projected CA: 0.4 (percent of GDP).
    - Cycl. Adj. CA: 0.1 (percent of GDP).
    - EBA CA Norm: –0.4 (percent of GDP).
    - EBA CA Gap: 0.5 (percent of GDP).
    - Staff Adj.: -0.2 (percent of GDP).
    - Staff CA Gap: 0.3 (percent of GDP).
  - Staff adjustments to the EBA results:
    - Adjustment (i): CA norm of Australia should be adjusted by –1.0 percent of GDP (implies adjusted CA norm of –1.4 percent of GDP) reflecting Australia’s traditionally large investment needs due to its size, low population density, and initial conditions.
    - Adjustment (ii): Projected cyclically-adjusted CA balance should be adjusted by –1.2 percent of GDP to account for temporary surge in iron ore prices (iron ore prices increased to 37 percent above medium-term WEO commodity price assumptions and iron ore exports amount to about 3.3 percent of GDP).
  - Taking adjustments into consideration, the staff-adjusted CA gap would be in the range of –0.2 to +0.8 percent of GDP (midpoint of 0.3 percent of GDP).

### Real exchange rate
- Background:
  - Australia’s REER entered an overall depreciation path since the unwinding of the commodity boom in 2014.
  - As of November 2019, the REER was around 4.7 percent below the 2018 average, partly reflecting uncertainties related with US-China trade tensions, volatile commodity prices, and narrowing interest gap between Australian bonds and U.S. treasury bills.
- Assessment:
  - For 2019, the REER gap is tentatively estimated to be in the range of -3 to 0 percent of GDP (with the midpoint of 1.5 percent of GDP) by the EBA CA model.

### Capital and financial accounts: flows and policy measures
- Background:
  - The financial account recorded net outflows in Q2–Q3, 2019, reflecting the improvement in the CA balance.
  - Foreign direct investment continued in 2019 but was offset by portfolio investment outflows, against the backdrop of higher interest rates abroad.
- Assessment:
  - Vulnerabilities related to the financial account are limited, supported by a credible commitment to a floating exchange rate.

### FX intervention and reserves level
- Background:
  - A free floater since 1983. The central bank has not intervened in the foreign exchange market since the GFC.
  - The authorities are strongly committed to a floating regime, which reduces the need for reserve holdings.
- Assessment:
  - Although domestic banks’ external liabilities are sizable, they are either in local currency or hedged, so reserve needs for prudential reasons are limited.

*Annex I. External Sector Assessment — IMF staff assessment as presented in the source document.*

### 6.      While impacts from these four layers from 2018 (Year 1) onwards are large for China

### 1ausea2020001 - 6.      While impacts from these four layers from 2018 (Year 1) onwards are large for China

### Regional real GDP impacts from U.S.-China trade tensions
- China: largest impact on real GDP of -1.2 percent relative to the April 2018 WEO by 2020 (Year 3).
- United States: impact on real GDP of -0.5 percent by 2020 (Year 3).
- Other Asia-Pacific countries: more limited impacts; countries with strong and diverse trading relationships with China, such as Korea, suffer larger spillovers.
- Australia: impacts are relatively limited in the tariff scenario shown (see figure referenced in source).

### Channels of impact (tariffs, confidence, markets, productivity)
- Tariff actions produce country-differentiated effects; for Australia and other major Asian markets shown, tariff actions between the United States and China lead to small positive effects via trade diversion.
- Over half of the negative short-term effects for the United States and China are driven by negative impacts from business confidence and financial markets.
- For Australia and the large Asian economies shown, the real GDP losses are fully attributable to business confidence and financial market effects.
- Productivity effects are largest for countries that must adjust production structures—notably the United States and China—shifting to sectors with less comparative advantage.

### Australia — rebalancing between domestic and external sectors
- Real effective exchange rate (REER): would depreciate by 0.4 percent by 2023 (Year 6) in response to falling demand from China, given Australia’s flexible exchange rate regime.
- External sector response: depreciation allows Australia to export more to other countries and shift into exports of services, helping offset declines in Chinese demand for Australian commodities.
- Domestic sector response: hit harder due to direct impacts of business confidence and financial market shocks on investment, and lower consumption from wealth and income shocks in the commodities sector.

### Australia — sensitivity to China’s fiscal stimulus scenarios
- China’s baseline fiscal stimulus (first scenario): 1.5 percent of GDP in 2019, and 0.8 percent of GDP in 2020 and 2021; central bank does not raise interest rates to offset inflationary effects.
  - Composition: 0.7 percent of GDP on infrastructure investment in 2019; remainder focused on consumption through VAT cuts, PIT cuts and other transfers targeted to lower-income households.
- Second scenario: exclusively an increase in infrastructure investment that achieves the same outcomes for real GDP as the first scenario, requiring stimulus of roughly half the size of the first scenario.
- China’s steel demand response under stimulus: increases by about 0.2 percent of GDP in 2019 and 0.1 percent of GDP in 2020 and 2021, of which half is produced by imports of Australian coal and iron ore.
- Implication: a stimulus focused on infrastructure investment would lead to more sustained benefits for Australia (through commodity exports for steel production) versus a stimulus focused on consumption, which would be supporting mainly Australian services demand in later years.

### Annex V — Debt Sustainability Analysis (selected figures)
- External debt bound-tests: baseline and scenario labels shown (figures referenced). Notes include:
  - 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 2018 and 80 percent of fx denominated external debts are assumed to be hedged to local currency.
- Public Sector DSA — Baseline Scenario (figures "As of January 29, 2020" shown):
  - Nominal gross public debt (in percent of GDP): 27.0, 41.1, 41.5, 42.2, 42.9, 42.9, 42.4, 41.0, 39.5 (years across projection horizon).
  - Public gross financing needs (in percent of GDP): 3.4, 1.8, 1.0, 3.7, 3.7, 3.5, 3.6, 3.3, 3.9.
  - Real GDP growth (in percent): 2.6, 2.5, 2.7, 1.8, 2.0, 2.4, 2.5, 2.6, 2.6.
  - Inflation (GDP deflator, in percent): 2.0, 3.7, 2.2, 3.3, 1.2, 0.8, 1.3, 2.0, 2.2.
  - Effective interest rate (in percent): 5.6, 3.6, 3.5, 3.4, 3.2, 3.0, 2.9, 2.9, 3.0.
  - Change in gross public sector debt (cumulative): 3.4, 0.6, 0.4, 0.8, 0.7, 0.0, -0.5, -1.4, -1.5, -2.0 (cumulative across projection years).
  - Primary deficit: 2.8, 0.8, 0.1, 0.1, 0.0, -0.4, -0.6, -0.7, -0.9, -2.5 (levels across projection horizon).
  - Primary (noninterest) revenue and grants (in percent of GDP): 32.8, 34.5, 35.3, 35.3, 35.4, 35.5, 35.2, 34.8, 34.8, 21.1.
  - Primary (noninterest) expenditure (in percent of GDP): 35.6, 35.3, 35.4, 35.4, 35.4, 35.1, 34.6, 34.1, 34.0, 208.6.
  - Automatic debt dynamics contribution (interest rate/growth differential): 0.3, -1.0, -0.6, -0.7, 0.0, -0.1, -0.4, -0.8, -0.8, -2.7.
  - Other identified debt-creating flows: 1.2, 1.3, 1.4, 1.8, 1.2, 1.0, 1.0, 0.6, 0.6, 6.2.
  - Residual, including asset changes: -0.8, -0.5, -0.5, -0.5, -0.5, -0.5, -0.5, -0.5, -0.5, -3.0.
- Public DSA — Underlying assumptions and alternative scenarios (selected):
  - Baseline real GDP growth in projection years: 1.8, 2.0, 2.4, 2.5, 2.6, 2.6.
  - Baseline inflation: 3.3, 1.2, 0.8, 1.3, 2.0, 2.2.
  - Baseline primary balance: -0.1, 0.0, 0.4, 0.6, 0.7, 0.9.
  - Historical scenario primary balance: -0.1, -2.5, -2.5, -2.5, -2.5, -2.5.
  - Constant Primary Balance scenario primary balance: -0.1, -0.1, -0.1, -0.1, -0.1, -0.1.
  - Effective interest rate assumptions vary across scenarios (listed in figures).

### Annex VI — Selected key macroprudential policy measures, 2014–19 (Australia)
- Dec 2014:
  - Speed limit curtailing annual growth in a bank's investor housing lending to 10 percent.
  - Serviceability assessments for new mortgage lending to include interest rate buffers of at least 2 percentage points above the effective variable rate applied for the term of the loan, and a minimum floor assessment rate of at least 7 percent.
  - Supervisors to be alert to high levels of higher-risk mortgage lending: high LVR and/or loan-to-income ratio; owner-occupier loans with lengthy interest-only periods.
- Jul 2015:
  - Announced increase in capital adequacy requirements for residential mortgage exposures for ADIs accredited to use the IRB approach, effective July 1, 2016: increase average risk weights to at least 25 percent from about 16 percent, equivalent to increasing minimum capital requirements for major banks by approximately 80 basis points.
- Jan 2016:
  - Countercyclical capital buffer (CCyB) incorporated into capital standards for locally incorporated ADIs; Australian jurisdictional CCyB applying from January 1, 2016 will be zero percent of risk-weighted assets until APRA determines otherwise.
- Mar 2017:
  - Limit flow of new interest-only lending to 30 percent of new residential mortgage lending, with strict internal limits on interest-only lending at LVRs above 80 percent and strong scrutiny for LVR above 90 percent.
  - Restraint on lending growth in higher-risk portfolio segments (high LTI, high LVR, very long-term loans).
- Apr 2018 (effective July 1, 2018 for qualifying ADIs):
  - 10 percent investment lending growth benchmark will no longer apply where ADI meets operating and Board assurance conditions.
  - Continued requirements: interest rate buffers above 2 percentage points and interest rate floors above 7 percent; apply buffers/floors to both new and existing debt commitments; discounts on uncertain/variable income with haircuts of at least 20 percent; for interest-only loans assess serviceability over principal-and-interest period; manage overrides to lending policies with Board-set risk tolerances; internal risk appetite limits on proportion of new lending at very high debt-to-income (>6).
- Dec 2018:
  - For ADIs that provided necessary assurances and are no longer subject to the investor loan growth benchmark, the interest-only benchmark will also no longer apply effective January 1, 2019; for other ADIs, removal concurrent with investor loan growth benchmark removal.
- July 2019:
  - Removal of the quantitative serviceability floor rate of at least 7 percent, given prevailing low interest rate environment and introduction of differential pricing for mortgage products.
  - Increase serviceability buffer to at least 2.5 percentage points over the loan’s interest rate from 2 percentage points.

*Source: IMF staff calculations and annexed DSA and policy tables in the provided content.*

### Annex VII. Follow-Up on Key Recommendations of the 2018

### Annex VII. Follow-Up on Key Recommendations of the 2018 FSAP

### Banking and Insurance Supervision
- Recommendation: Strengthen the independence of APRA and ASIC, by removing constraints on policy making powers and providing greater budgetary and funding autonomy; strengthen ASIC’s enforcement powers and expand their use to mitigate misconduct (Treasury, APRA, ASIC).
  - Time Frame: ST
  - Status: In process.
  - Developments and implementation:
    - ASIC’s industry funding model, under which it recovers regulatory costs from industry and charges fees for service, came into full effect on July 4, 2018.
    - On April 6, 2019, ASIC was granted a product intervention power; ASIC has used this power in short-term credit and consulted on proposals for binary options, CFDs and add-on financial products by car yards.
    - On February 18, 2019, Parliament passed legislation to significantly increase penalties for corporate misconduct.
    - On November 28, 2019, the Government introduced legislation to strengthen ASIC’s licensing and banning powers and enhance ASIC’s investigatory capability.
    - The Government committed to introduce legislation to enhance ASIC’s regulatory and supervisory tools (breach reporting requirements and direction powers) by June 2020.
    - APRA is provided A$150 million in additional funding in the 2019/20 Budget; the Government will consider additional funding need in the 2020/21 Budget process.
    - APRA’s new Enforcement Approach was published on April 15, 2019.

- Recommendation: Enhance APRA’s supervisory approach by carrying out periodic in-depth reviews of governance and risk management (APRA).
  - Time Frame: ST
  - Status: In process.
  - Developments and implementation:
    - In-depth reviews of governance and risk management are a key part of APRA’s approach to transforming the Governance, Culture, Remuneration and Accountability (GCRA) of regulated institutions—an important community outcome in APRA’s 2019-2023 Corporate Plan.
    - On November 19, 2019, APRA released its information paper Transforming Governance, Culture, Remuneration and Accountability: APRA’s Approach outlining plans to strengthen policy frameworks, sharpen supervisory practices and share insights.

- Recommendation: Strengthen the integration of systemic risk analysis and stress testing into supervisory processes (APRA, RBA).
  - Time Frame: I
  - Status: In process.
  - Developments and implementation:
    - APRA is replacing PAIRS and SOARS with a revised Supervision Risk and Intensity (SRI) model incorporating an External Factors category to focus on systemic impacts; the model requires supervisors to consider recent stress tests in capital ratings. The model has been widely tested in APRA and is due to be launched in June/July 2020.
    - APRA revised its stress testing strategy to implement industry-focused stress test cycles; efficient and repeatable annual stress testing of ADIs; and expand data collections to facilitate internal modelling and stress testing reconciliations.

- Recommendation: Encourage further maturity extension and lower use of overseas wholesale funding (APRA).
  - Time Frame: I
  - Status: In process.
  - Developments and implementation:
    - The CFR discussed banks’ offshore funding at its September 2019 meeting and noted banks manage offshore borrowing risks through currency hedging and holding foreign currency liquid assets, and welcomed progress lengthening offshore term debt maturity. Further lengthening would reduce rollover risk.

### Financial Stability Analysis
- Recommendation: Commission and implement results of a comprehensive forward-looking review of potential data needs. Improve the quantity, quality, granularity and consistency of data available to the CFR agencies to support financial supervision, systemic risk oversight and policy formulation (CFR agencies).
  - Time Frame: MT
  - Status: In process.
  - Developments and implementation:
    - A Multi-Agency Data Collection Committee has been established including APRA, ASIC, RBA, Treasury and the Australian Bureau of Statistics.
    - The Committee will review potential data needs forward-lookingly and explore streamlining data collection and use to improve quantity, quality, granularity and consistency of data across CFR agencies.

- Recommendation: Enhance the authorities’ monitoring, modeling and stress testing framework for assessing solvency, liquidity and contagion risk. Draw on the results to inform policy formulation and evaluation (CFR agencies).
  - Time Frame: ST
  - Status: In process.
  - Developments and implementation:
    - APRA is implementing a new stress testing strategy, including the 2019 Authorized Deposit-Taking Institutions (ADI) Stress Test and the ADI Internal Capital Adequacy Assessment Process (ICAAP) review.

### Systemic Risk Oversight and Macroprudential Policy
- Recommendation: Raise formalization and transparency of the CFR and accountability of its member agencies through publishing meeting records as well as publication and presentation of an Annual Report to Parliament by CFR agency Heads (CFR agencies).
  - Time Frame: I
  - Status: In process.
  - Developments and implementation:
    - The CFR has increased transparency by: (i) publishing a statement following regular CFR meetings since December 2018; (ii) increasing coverage in the RBA’s Financial Stability Review (bi-annual); and (iii) updating the CFR website to be more informative.
    - The Government is establishing the Financial Regulator Oversight Authority (FROA), an independently-chaired panel to report on regulators’ effectiveness as recommended by the Hayne Royal Commission. FROA will not have power to direct regulators or make, assess or comment on specific regulatory decisions, complaints and like matters.
- Recommendation: Undertake a CFR review of the readiness to apply an expanded set of policies to address systemic risks, including data and legal/regulatory requirements; and address impediments to their deployment (CFR agencies).
  - Time Frame: I
  - Status: In process.
  - Developments and implementation:
    - The Housing Market Risk Working Group under the CFR considers risks and appropriate policies, tools that might be available, circumstances for use, and any restrictions (e.g.: data availability).
- Recommendation: Commission analysis by CFR member agencies on relevant financial stability policy issues, including: policies affecting household leverage; as well as factors affecting international investment flows and their implications for real estate markets (CFR agencies).
  - Time Frame: MT
  - Status: In process.
  - Developments and implementation:
    - The CFR actively considers policy impacts on financial stability; the Housing Market Risk Working Group reports quarterly to the CFR on housing market risks.
    - The RBA participates in a Committee on the Global Financial System working group studying property price dynamics and international investor influence.

### Financial Crisis Management and Safety Nets
- Recommendation: Complete the resolution policy framework and expedite development of resolution plans for large and mid-sized banks and financial conglomerates, and subject them to annual supervisory review (APRA, Treasury).
  - Time Frame: ST
  - Status: In process.
  - Developments and implementation:
    - APRA will consult on and finalize its prudential framework for recovery and resolution planning in 2020 per its Corporate Plan; strategic initiatives include uplifting capability for resolution planning.
    - Work on major bank resolution planning is ongoing (including through the CFR and Trans-Tasman Council on Banking Supervision (TTBC)).

- Recommendation: Extend resolution funding options by expanding loss-absorption capacity for large and mid-sized banks and introduce statutory powers (APRA, Treasury).
  - Time Frame: ST
  - Status: In process.
  - Developments and implementation:
    - On November 8, 2018, APRA released a discussion paper proposing changes to the capital adequacy framework for ADIs to support orderly resolution.
    - In early July 2019, APRA released its final position requiring the D-SIBs to lift Total Capital by three percentage points of RWA by January 1, 2024, and has an overall long-term target of four to five percentage points of loss absorbing capital. Requirements for mid-sized banks will be settled as part of resolution planning.

- Recommendation: Advance mutual understanding between the Australia and New Zealand resolution authorities on cross-border bank resolution modalities, through the Trans-Tasman Banking Council (TTBC) (CFR agencies).
  - Time Frame: ST
  - Status: In process.
  - Developments and implementation:
    - The TTBC continues to discuss and develop mutual understanding on cross-border financial stability and bank resolution; a statement was released in November 2019 following the most recent meeting of the Heads.
    - Commencing in 2020, APRA and the RBNZ will establish entity specific Crisis Management Groups to develop and evaluate detailed entity-specific, cross-border resolution strategies.

### Financial Market Infrastructure (FMI)
- Recommendation: Strengthen independence of RBA and ASIC for supervisory oversight, enhance enforcement powers and promote compliance with regulatory requirements.
  - Time Frame: I
  - Status: In process.
  - Developments and implementation:
    - The CFR released a consultation paper in November 2019 on proposed enhancements to Australia’s FMI regulatory regime, including enhanced powers for ASIC and the RBA to support FMI supervision and their ability to take action to address identified deficiencies.
    - Proposals include transfer of licensing and supervisory powers from the Minister to ASIC and the RBA; following stakeholder feedback, the CFR will consider recommending changes to the Government.
- Recommendation: Finalize the resolution regime for FMIs in line with the FSB Key Attributes (RBA, ASIC, Treasury).
  - Time Frame: ST
  - Status: In process.
  - Developments and implementation:
    - The CFR consultation paper (November 2019) included proposals that would form part of a resolution regime for domestic clearing and settlement facility licensees. Following stakeholder feedback, the CFR will consider recommending implementation of a resolution regime in Australia.

### Anti-Money Laundering / Countering the Financing of Terrorism (AML/CFT)
- Recommendation: Expand the AML/CFT regime to cover all designated non-financial businesses and professions (DNFBPs) and strengthen AML/CFT supervision by: improving data collection and risk analysis; increasing oversight of controls and compliance; and undertaking more formal enforcement action in the event of breaches (Department of Home Affairs, Treasury, AUSTRAC).
  - Time Frame: I
  - Status: In process.
  - Developments and implementation:
    - The Government’s most recent AML/CTF and Other Legislation Amendment Bill 2019 will: (i) strengthen the regime by improving requirements around customer identification, correspondent banking and the sharing of financial intelligence, and (ii) address barriers to successful prosecution of money laundering offences.
    - In October 2019, AUSTRAC published its ML/TF risk assessment of Australia’s mutual banking sector (including mutual banks, credit unions and building societies).
    - AUSTRAC received additional Government funding to expand its risk assessment program between 2018-2021, developing detailed risk assessments of the banking, gambling and remittance sectors, and increasing partnership with industry and government Partner Agencies through the Fintel Alliance.
    - AUSTRAC has taken formal enforcement actions against reporting entities for breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

*Sources: IMF (2019), Australia, Financial Sector Assessment Program—Financial System Stability Assessment; and the Australian authorities.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1ausea2020001.pdf_