## 1nzlea2021001

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---

### A. Context and Recent Developments
- Health management and epidemiology
  - Strict managed quarantine, testing, contact tracing, social distancing, a hard lockdown in 2020Q2, and ongoing strict travel restrictions controlled infections rapidly after March/April 2020.
  - Intermittent small regional clusters; only 26 deaths to date.

- Output, inflation, and labor market
  - Real GDP declined by 2.9 percent in 2020.
  - Production GDP rebound: temporarily surpassed pre-COVID levels in 2020Q3; moderated in 2020Q4.
  - Inflation: 1.4 percent y/y in 2020Q4.
  - Unemployment: reached 5.3 percent in 2020Q3; declined to 4.9 percent by end-2020.
  - Hourly wages grew by one percent q/q in 2020Q4.
  - Job losses concentrated in contact-intensive services; disproportionate impact on youth, women, and some ethnic groups.

- External sector and trade
  - Current account deficit narrowed to 0.8 percent of GDP in 2020.
  - Import volumes: -16.3 percent in 2020.
  - Export volumes: -12.1 percent in 2020.
  - Terms of trade improved by one percent.
  - Real exchange rate: depreciation of 1.7 percent from end-2019.
  - Main model suggests REER overvalued by about 1.4 percent; other methods center on mid-point undervaluation of about 0.3 percent (Annex I); assessment subject to exceptionally high uncertainty.

- Trade agreements
  - Signatory of RCEP.
  - Upgrades to bilateral FTA with China: added chapters on environment, competition policy, government procurement and e-commerce; modernized rules and procedures.

- Financial system and housing
  - Banks: well-capitalized and liquid; non-performing loan ratio 0.6 percent in December 2020.
  - RBNZ liquidity provision reduced banks’ funding costs and wholesale funding requirements.
  - Mortgage payment deferrals declined from 8 percent to 0.8 percent of total mortgage loans over May–December 2020.
  - Business loans dropped substantially; housing loans grew supported by temporary removal of LVR restrictions.
  - National house prices rose by 24 percent y/y in March 2021.
  - Commercial real estate accounts for about 8 percent of bank lending.

### B. Outlook
- Near-term growth and labor market
  - Real GDP projected to grow by 4 percent in 2021, driven by domestic demand.
  - Unemployment expected to peak at around 5.1 percent.
  - Wage growth expected to remain modest.

- Inflation and migration
  - Temporary lift to inflation from higher commodity prices and shipping costs possible.
  - Inflation expected to durably reach the two-percent midpoint of the RBNZ’s target range only from 2024.
  - Net migration expected to gradually normalize once the border reopens; border closure for visitors expected to be gradually lifted starting toward the end of 2021.
  - Travel bubble with Australia started on April 19, 2021.

- Medium-term potential output
  - Pandemic likely to reduce potential output by about 3¾ percent in the medium-term relative to pre-COVID projections due to lower labor supply (muted migration), weak capital accumulation, and slowing productivity growth.

- Balance-sheet pressures
  - Macrofinancial vulnerabilities and balance-sheet stress expected to increase with expiry of COVID-19 support.
  - Business insolvency likely to increase, especially in disproportionately affected sectors (Annex II).

### C. Risks
- Key near-term risks
  - Domestic and global COVID-19 paths, including renewed domestic outbreaks and delayed border reopening.
  - COVID-19’s impact on trading partners and export commodity prices.
  - Faster-than-expected vaccine rollout could be an upside by prompting faster border reopening.

- Financial stability risks
  - Rising housing demand amid low-for-long interest rates and structural housing supply shortages may amplify the housing cycle.
  - Unsustainable house prices, tightening credit standards, or a sharp rise in mortgage rates could trigger a pronounced correction.

- Other risks
  - Geopolitical tensions affecting trade and commodity prices, cyber-attacks, and exposure to natural disasters (Annex III).

### D. Authorities’ Views
- Authorities agree the economy has not fully recovered and uncertainty remains exceptionally large.
- Concern highlighted about rapid rise in house prices—reducing affordability and raising macrofinancial risks—and emphasis on need for comprehensive demand and supply measures.
- Authorities agreed that movements in the New Zealand dollar were justified by trade and financial flows and commodity price developments.

---

### Supporting a Durable Handoff from Public to Private Demand — Policy Measures
- Scale of policy response
  - Fiscal measures: NZ$ 62.1 billion (19.3 percent of GDP) above the line through FY2024/25 (wage subsidies, infrastructure investment, tax measures).
  - Other measures (below the line and guarantees): NZ$ 9.5 billion (2.9 percent of GDP) — Business Finance Guarantee Scheme NZ$ 6.3 bn; Small Business Cashflow Scheme NZ$ 1.6 bn; Convertible debt agreement with Air NZ NZ$ 1.5 bn; R&D Loan Scheme NZ$ 0.2 bn.

- Discretionary fiscal support (selected items)
  - Wage subsidies: NZ$ 14.8 bn
  - Expansion of Flexi-wage subsidies: NZ$ 0.3 bn
  - Targeted training and apprenticeship fund: NZ$ 0.3 bn
  - Permanent increase in social benefits: NZ$ 2.4 bn
  - Income Relief Payment: NZ$ 0.6 bn
  - Increase in Winter Energy Payment: NZ$ 0.5 bn
  - Business tax loss carry-back scheme: NZ$ 3.1 bn
  - Permanent change in business tax: NZ$ 2.8 bn
  - Support for the aviation sector: NZ$ 0.6 bn
  - Tourism recovery package: NZ$ 0.4 bn
  - Infrastructure package: NZ$ 3.0 bn
  - Water infrastructure project: NZ$ 0.8 bn
  - Support for transport projects: NZ$ 0.6 bn
  - Vaccines, isolation, and other health costs: NZ$ 3.9 bn
  - Government housing program: NZ$ 0.7 bn
  - Government R&D: NZ$ 0.2 bn
  - Unallocated: NZ$ 10.3 bn
  - Others: NZ$ 16.8 bn

- Monetary policy and liquidity
  - RBNZ cut the cash rate by 75 basis points to 0.25 percent in March 2020.
  - Introduced LSAP (quantitative easing) and the Funding for Lending Program (FLP).
  - Introduced term funding facilities and other liquidity provisions; some temporary facilities with low usage removed as conditions improved.
  - RBNZ signaled readiness to maintain stimulatory policies for a considerable time and operational readiness for negative interest rates.
  - Updated remit (effective March 2021) requires the monetary policy committee to assess effects of its decisions on the government’s policy relating to sustainable house prices; core objectives (inflation near two percent midpoint and supporting maximum sustainable employment) remain unchanged.

---

### Staff Views and Policy Recommendations
- Overall stance
  - Fiscal and monetary policy mix should remain appropriately accommodative given an uneven and uncertain recovery.
  - Additional stimulus is not currently needed under the baseline, but support should not be withdrawn prematurely; additional fiscal and monetary support should be deployed if downside risks materialize.

- Fiscal policy recommendations
  - Fiscal policy should play the primary role in addressing distributional impacts and pre-existing structural issues.
  - Remain sufficiently accommodative in the near term to ensure a successful transition from public to private demand and limit scarring.
  - Carefully calibrate pace of fiscal normalization to support employment and minimize bankruptcies of distressed but viable firms.
  - Authorities should stand ready to deploy additional fiscal support if the recovery falters, including additional public investment and targeted income and liquidity support.
  - Contingency measures to manage resurgence events are welcome to mitigate uncertainty.

- Monetary policy recommendations
  - Maintain accommodative monetary policy and liquidity provision; be prepared to provide additional monetary stimulus if necessary.

---

### Labor Market Policy and Social Protection
- Wage subsidy program central during acute phase; shift from job retention to active labor market policies (ALMPs) appropriate.
- Recommendations
  - Expand ALMPs (free training, hiring subsidies such as Flexi-wage) focusing on workers disproportionately affected: youth, low-skilled workers, women, and some ethnic groups.
  - Broaden coverage of training programs to reflect industry needs; use the Reform of Vocational Education to enhance effectiveness.
  - Permanent increase in unemployment benefits from a relatively low level strengthens automatic stabilizers.
  - The increase in the top income tax rate from 33 to 39 percent will help finance the permanent increase in unemployment benefits and mitigate growing inequality.

---

### Fiscal Position and Debt Sustainability
- Net government debt projected to peak at 29 percent of GDP in FY2023/24.
- Debt Sustainability Assessment: debt trajectory remains sustainable under stress scenarios; substantial fiscal space remains.
- Staff supports suspension of authorities’ debt target to provide flexibility.
- Authorities intend to stabilize net debt as a percent of GDP by the mid-2020s then reduce it as conditions permit; public debt anchor to be reviewed once pandemic-related uncertainty subsides.

---

### Monetary Policy and Financial Sector Resilience
- Monetary policy
  - Remain accommodative for an extended period; avoid premature tightening given slack and muted inflation/wage pressures.
  - RBNZ has scope for additional easing, potentially including moderately negative interest rates, if downside risks materialize.
  - If recovery is stronger-than-expected, earlier tapering of bond purchases could be considered.
  - Monetary policy should remain focused on inflation and employment objectives; avoid overloading monetary policy with housing affordability goals.

- Financial sector resilience and macroprudential policy
  - Rapid increase in riskier housing loans: investor lending pickup, high-LVR loans increased rapidly; share of interest-only loans to investors around 40 percent.
  - RBNZ re-imposed LVR restrictions from March 2021 at pre-pandemic levels; further tightening from May 2021: limits of a maximum of 20 percent of new lending to owner-occupiers at LVRs above 80 percent, and 5 percent of new lending to investors at LVRs above 70 percent (reduced to 60 percent from May 2021).
  - Planned rise in bank capital requirements from 10.5 to 16 percent of risk-weighted assets (18 percent for the four large banks) over seven years starting from July 2020 postponed; starting date postponed to July 2022.
  - Interim RBNZ stress tests suggest banks’ existing capital positions would withstand severe but plausible shocks.
  - Staff recommendations:
    - Maintain ample liquidity until recovery is well established.
    - Keep macroprudential tools readily available; reinstatement of LVRs and further tightening for investors will help mitigate stability risks.
    - Consider additional tools: debt-to-income (DTI) ratio limits, caps on interest-only loans, higher bank capital risk weights on mortgage lending.
    - Address adverse distributional consequences of macroprudential policies through fiscal and structural policies.
    - Reconsider relatively low deposit insurance coverage at NZ$50,000 per depositor per institution.

---

### Regulatory Reform and Supervisory Capacity (RBNZ Act Phase 2)
- RBNZ Bill will add an overarching financial stability objective and introduce a Financial Policy Remit issued by the Minister of Finance.
- Governance changes: move from single decision-maker (Governor) to a Board of non-executives responsible for oversight, policy-making, and regulatory decisions; monetary policy remains reserved for the MPC with executives in majority.
- Funding model changes to recover regulatory costs through industry levies and fees.
- Council of Financial Regulators given statutory basis.
- Assessment and recommended clarifications:
  - Revise Board structure for better coordination between monetary and financial policies.
  - Clarify remit matters are for RBNZ’s understanding of financial stability objective and provide RBNZ opportunity to disclose intended reaction to the remit.
  - Phase 2 offers opportunity to ensure RBNZ has adequate operational autonomy and full macroprudential toolkit.

- Selected FSAP follow-up updates (selected figures and timings preserved)
  - New funding agreement signed in June 2020: average of NZ$115 million a year over five years from July 2020 (up about $35 million).
  - Capital requirements: raise minimum capitalization from 10.5 percent to 18 percent for four large banks and 16 percent for remaining banks in seven years; target date extended to July 2022.
  - Deposit insurance: plan to introduce deposit insurance with a $50,000 limit per person per institution, funded by levy on deposit takers, with Government backstop.

---

### Housing Sector Imbalances and Policy Responses
- Structural imbalances from insufficient supply amplified by record-low mortgage rates and temporary removal of LVR restrictions, pushing up prices against tight inventory.
- Government late-March housing package (selected measures)
  - Remove tax deductibility for mortgage interest of property investors: tax deductibility will cease at the end of September 2021 for newly purchased investment properties (except for newly built properties); phased out over four years for properties bought before March 27, 2021; owner occupiers not affected.
  - Extend minimum holding period to exempt capital gains on investment properties from income tax: minimum holding period extended from five to ten years for newly-acquired properties (except newly built homes and owner-occupier homes).
  - Increase support for first-home buyers: revise Income and property price caps upward under First Home Grant and First Home Loan schemes.
  - Provide NZ$3.8 billion Housing Acceleration Fund and support Kāinga Ora to borrow an additional NZ$2 billion for strategic land purchases.

- Staff assessment
  - Demand-side measures (interest deductibility change) can materially affect attractiveness of property investment and improve affordability for owner-occupiers.
  - Supply-side measures (Housing Acceleration Fund) can help unlock housing supply; quick and efficient implementation important.
  - Long-term affordability requires freeing up land supply, improving planning and zoning, infrastructure investment, increasing social housing, and reforming the RMA.

---

### Structural Policies to Promote Durable, Inclusive, and Green Growth
- Long-standing structural challenges: weak productivity growth, low inward FDI, weak capital deepening, infrastructure gaps.
- Pandemic aggravated inequality and labor-market scarring risks.
- Staff recommendations
  - Scale up innovative investment and R&D spending; R&D tax credits can support private innovative investment; scale up government R&D and expand capacities of Crown Research Institutes.
  - Reduce entry barriers and simplify administrative processes to strengthen competition; improve state-owned enterprises’ performance.
  - Upgrade infrastructure and step up green investment; use “shovel-ready” projects and direct investment towards low-emissions infrastructure and technology.
  - Facilitate worker reallocation with ALMPs focused on displaced workers and broaden training program coverage to match industry needs.
  - Reform the Overseas Investment Act to streamline FDI approval, attract higher-quality FDI, and deepen global connectivity; authorities’ intention to use the new national interest test sparingly is welcome.

---

### Structural Policies and Productivity (Authorities’ views)
- Authorities concur structural policies are central to lifting medium-term growth and address weak productivity via:
  - Strengthened R&D tax credits.
  - Improved quality of government R&D spending.
  - ALMPs for displaced workers.
  - Higher infrastructure spending.
  - Limited near-term scope for scaling up green investments while projects in early planning stages.
  - Use new national interest test sparingly; no proposed project rejected since May 2020.
  - Simplification of FDI approval implemented via 2020 Urgent Measures Bill; further steps planned in Overseas Investment Act reform.

---

### External Sector Assessment (Annex I) — Key Points and Numbers
- 2020 external position broadly in line with fundamentals and desired policy settings.
- Historical CA deficits averaged close to 4 percent of GDP over past decades.
- NIIP:
  - NIIP narrowed slightly to -53.7 percent of GDP at end-2019.
  - NIIP rose to -55 percent in 2020.
- 2020 CA dynamics: narrowing due to larger decline in real imports than exports, improved terms of trade, narrowed primary income deficit, and increased portfolio inflows.
- REER movements:
  - REER declined from some 13 percent above long-term average in 2017 to just over 3 percent by end-2020.
  - Since 2020Q3, both real and nominal exchange rate appreciated somewhat.
- EBA estimates:
  - Cyclically-adjusted CA norm for 2020: -1.1 percent of GDP.
  - Actual cyclically-adjusted CA balance for 2020: -1.4 percent of GDP.
  - Implied CA gap: -0.3 percent of GDP → applying elasticity -0.23 implies estimated currency overvaluation of around 1.4 percent.
- Model consensus: average undervaluation of around 0.3 percent; on balance current account model considered reliable for external position assessment.
- External balance sheet structure reduces vulnerability:
  - External NIIP liabilities mainly in New Zealand dollars; net foreign currency asset position.
  - Banking sector net foreign currency liability position fully hedged.
  - RBNZ domestic funding provision largely eliminated need for banks’ external financing.
- High uncertainty noted; possible transitory components to 2020 CA compression and potential future revisions.

---

### Annex VII — Impact of the Pandemic on Medium-Term Potential Output
- Rebound in 2020H2 noted, but pandemic and border restrictions expected to lower trend growth.
- Past recessions: on average medium-term output remains 4½ percent below pre-recession after crisis.
- Expected channels for New Zealand:
  - Lower labor input (muted net migration), weaker capital accumulation, productivity slowdown.
  - Shortage of skilled labor due to reduced migration likely to adversely affect productivity.
- Pandemic expected scarring: 3¾ percent loss of potential output in the medium-term.
- Infrastructure spending gap estimated between 8 and 23 percent of GDP.
- Recommended efforts to limit scarring: address weak productivity, infrastructure gap, and product market regulations.

---

### Annex VIII — Uneven Impact of the Pandemic on the Labor Market
- Labor market deterioration limited by wage subsidies.
- Key statistics:
  - Unemployment rate: increased to 4.9 percent in 2020Q4 from 4.1 percent in 2019Q4.
  - Underutilization rate: increased to 11.9 percent in 2020Q4 from 10.1 percent in 2019Q4.
  - Youth unemployment: largest adjustment, with a 2.4 percentage point y/y increase in the youth unemployment rate.
- Uneven impacts: greater effects on young workers, female workers, some ethnic groups, and low-skilled workers.

---

### Box Summaries (selected)
- Box: New Zealand’s success in fighting the COVID-19 battle
  - Four-level Alert system; state of emergency; Alert Level 4 lockdown; strategy of speedy testing, contact tracing, isolation; local transmission eliminated by June 2020.
  - By June 2020: 10,000 tests per day capacity; returning residents required two-week supervised quarantine from April 2020.
  - Moved to Alert Level 1 in June 2020; maintained strict travel restrictions; two localized Auckland lockdowns after localized resurgence.

- Box: House-Prices-at-Risk (HaR) summary
  - House prices increased sharply: 12 percent y/y nominal increase in 2020Q4.
  - Staff estimates indicate downside risks; conditional on 2020Q4 conditions, real house prices would fall by 12 percent over the next four quarters with a 10-percent likelihood.
  - Estimation does not incorporate impacts of March 2021 housing measures.

- Box 3: New Zealand House Prices and Affordability (December 2020 findings)
  - Attainable housing price methodology: DSTI range 25 to 40 percent; 1-year fixed average residential mortgage rate; 30-year principal and interest loan; LVR up to 80 percent; income = average annual household disposable income (end-June); “2021” estimates based on December 2020 prices and projected income increased by 1.5 percent y/y.
  - Actual median house prices about 22 percent higher than attainable under a 30-percent DSTI in December 2020.
  - Mortgage rates declined by 127 bps for one-year fixed rate since mid-2019.
  - Auckland median house prices close to 40 percent higher than national average; in December 2020 Auckland median prices were 11 percent higher than attainable under a DSTI of 40 percent.
  - Without interest rate cuts, Auckland affordability gap would have been about 30 percent.

---

### Green Recovery and Digitalization
- Green recovery
  - New Zealand high on GHG emissions; agriculture accounts for 50 percent of emissions (short-lived methane).
  - Institutional framework: Climate Change Response Act 2019 and Emissions Trading Scheme.
  - Required actions: transition from fossil fuels to electricity, substantial afforestation, changes to pastoral farming structure and methods.
  - Key timing: Climate Change Commission draft advice February 2021; first Emissions Budgets mid-2021; Emissions Reduction Plan late 2021; National Adaption Plan late 2022.
  - Opportunity to re-orient public and private investment toward low-emissions infrastructure and technology during recovery.

- Digitalization
  - Ultra-Fast Broadband Programme and Rural Broadband Initiative: 83 percent of population covered by fibre-to-the-home networks to date.
  - Remaining gap to international frontier; policy focus on digital skills, infrastructure quality and safety, and broader technology uptake.
  - Cybersecurity: recent cyberattacks affecting the RBNZ and the stock exchange highlight need to strengthen cyber resilience; RBNZ published principle-based guidance applying to regulated entities.
  - Small Business Digital Boost introduced to promote digital transformation of SMEs.

---

*International Monetary Fund — 1nzlea2021001 (Staff Report for the 2021 Article IV Consultation — Informational Annex).*

### 1. New Zealand’s Success in Fighting the COVID-19 Battle ______________________________________ 21

### 1. New Zealand’s Success in Fighting the COVID-19 Battle ______________________________________ 21

### A. Context and Recent Developments
- Health management and epidemiology
  - New Zealand brought infection rates under control quickly after March/April 2020 through strict managed quarantine, testing, contract tracing, social distancing, a hard lockdown in 2020Q2, and ongoing strict travel restrictions (Box 1).
  - Despite intermittent small regional clusters, the number of cases has stayed exceptionally low, with only 26 deaths to date.

- Output, inflation, and labor market
  - Real GDP declined by 2.9 percent in 2020.
  - Production GDP rebounded strongly in 2020H2, temporarily surpassing pre-COVID levels in 2020Q3 before moderating in 2020Q4.
  - Inflation: 1.4 percent y/y in 2020Q4.
  - Unemployment: reached 5.3 percent in 2020Q3 and declined to 4.9 percent by end-2020, helped by fiscal support.
  - Hourly wages grew by one percent q/q in 2020Q4.
  - Job losses were concentrated in contact-intensive service sectors and disproportionally impacted youth, women, and some ethnic groups.

- External sector and trade
  - Current account deficit narrowed to 0.8 percent of GDP in 2020.
  - Import volumes: -16.3 percent in 2020.
  - Export volumes: -12.1 percent in 2020.
  - Terms of trade improved by one percent on stronger food export prices, including dairy.
  - Real exchange rate: depreciation of 1.7 percent from end-2019.
  - External balance assessment: main model suggests the real exchange rate is overvalued by about 1.4 percent; other methodologies center around a mid-point undervaluation of about 0.3 percent (Annex I). Assessment subject to exceptionally high uncertainty.

- Trade agreements
  - New Zealand is among signatories of the Regional Comprehensive Economic Partnership (RCEP).
  - Upgrades concluded to the bilateral FTA with China, adding chapters on environment, competition policy, government procurement and e-commerce, and modernizing rules and procedures.

- Financial system and housing
  - Banks remained well-capitalized and liquid; non-performing loan ratio 0.6 percent in December 2020.
  - RBNZ liquidity provision reduced banks’ funding costs and wholesale funding requirements.
  - Mortgage payment deferrals declined from 8 percent to 0.8 percent of total mortgage loans over May-December 2020.
  - Business loans dropped substantially, driven by declines in commercial real estate, agriculture, and consumer loans; housing loans grew supported by temporary removal of LVR restrictions.
  - National house prices rose by 24 percent y/y in March 2021.
  - House price-to-rent ratios increased rapidly; rents rebounded after an initial decline.
  - Commercial real estate accounts for about 8 percent of bank lending.

### B. Outlook
- Near-term growth and labor market
  - Real GDP projected to grow by 4 percent in 2021, driven by domestic demand, despite a missed tourist season.
  - Unemployment expected to peak at around 5.1 percent.
  - Wage growth expected to remain modest.

- Inflation and migration
  - Inflation may see a temporary lift from higher commodity prices and temporary increases in shipping costs.
  - Inflation expected to durably reach the two-percent midpoint of the RBNZ’s target range only from 2024.
  - Net migration expected to gradually normalize once the border reopens; border closure for visitors expected to be gradually lifted starting toward the end of 2021. A travel bubble with Australia started on April 19, 2021.

- Medium-term potential output
  - Pandemic likely to reduce potential output by about 3¾ percent in the medium-term relative to pre-COVID projections due to lower labor supply (muted migration), weak capital accumulation, and slowing productivity growth.

- Balance-sheet pressures
  - Macrofinancial vulnerabilities and stress in business and household balance sheets expected to increase with expiry of COVID-19 support.
  - Business insolvency likely to increase, especially in disproportionately affected sectors (Annex II).

### C. Risks
- Key near-term risks
  - Domestic and global COVID-19 paths, including renewed domestic outbreaks and delayed border reopening.
  - COVID-19’s impact on trading partners and export commodity prices.
  - Faster-than-expected vaccine rollout could be upside by prompting faster border reopening.
- Financial stability risks
  - Rising housing demand amid low-for-long interest rates and structural housing supply shortages may have amplified the housing cycle, heightening financial stability and affordability concerns.
  - Unsustainable house prices, tightening credit standards, or a sharp rise in mortgage rates could trigger a pronounced correction (Box 2).
- Other risks
  - Geopolitical tensions affecting trade and commodity prices, cyber-attacks, and exposure to natural disasters (Annex III).

### D. Authorities’ Views
- Agreement with staff assessment that the economy has not fully recovered and that uncertainty remains exceptionally large.
- Authorities highlighted concern about rapid rise in house prices—reducing affordability and raising macrofinancial risks—and emphasized need for a comprehensive set of demand and supply measures.
- Authorities agreed with staff that movements in the New Zealand dollar were justified by trade and financial flows and commodity price developments.

### Supporting a Durable Handoff from Public to Private Demand
- Scale of policy response
  - Fiscal measures: NZ$ 62.1 billion (19.3 percent of GDP) above the line through FY2024/25, including wage subsidies, infrastructure investment, and tax measures.
  - Other measures: NZ$ 9.5 billion (2.9 percent of GDP) (Business Finance Guarantee Scheme NZ$ 6.3 bn; Small Business Cashflow Scheme NZ$ 1.6 bn; Convertible debt agreement with Air NZ NZ$ 1.5 bn; R&D Loan Scheme NZ$ 0.2 bn).

- Discretionary fiscal support breakdown (selected items)
  - Wage subsidies: NZ$ 14.8 bn
  - Expansion of Flexi-wage subsidies: NZ$ 0.3 bn
  - Targeted training and apprenticeship fund: NZ$ 0.3 bn
  - Permanent increase in social benefits: NZ$ 2.4 bn
  - Income Relief Payment: NZ$ 0.6 bn
  - Increase in Winter Energy Payment: NZ$ 0.5 bn
  - Business tax loss carry-back scheme: NZ$ 3.1 bn
  - Permanent change in business tax: NZ$ 2.8 bn
  - Support for the aviation sector: NZ$ 0.6 bn
  - Tourism recovery package: NZ$ 0.4 bn
  - Infrastructure package: NZ$ 3.0 bn
  - Water infrastructure project: NZ$ 0.8 bn
  - Support for transport projects: NZ$ 0.6 bn
  - Vaccines, isolation, and other health costs: NZ$ 3.9 bn
  - Government housing program: NZ$ 0.7 bn
  - Government R&D: NZ$ 0.2 bn
  - Unallocated: NZ$ 10.3 bn
  - Others: NZ$ 16.8 bn

- Monetary policy and liquidity
  - RBNZ cut the cash rate by 75 basis points to 0.25 percent in March 2020.
  - Introduced quantitative easing via a large-scale asset purchase program (LSAP) and the Funding for Lending Program (FLP).
  - Introduced term funding facilities and other liquidity provisions; some temporary facilities with low usage have been removed as market conditions improved.
  - RBNZ signaled readiness to maintain stimulatory policies for a considerable time and operational readiness for negative interest rates.
  - Updated remit (effective March 2021) requires the monetary policy committee to assess effects of its decisions on the government’s policy relating to sustainable house prices; core monetary objectives (inflation near two percent midpoint and supporting maximum sustainable employment) remain unchanged.

### Staff Views and Policy Recommendations
- Overall stance
  - The fiscal and monetary policy mix should remain appropriately accommodative given an uneven and uncertain recovery.
  - While additional stimulus is not currently needed, support should not be withdrawn prematurely; additional fiscal and monetary support should be deployed if downside risks materialize.

- Fiscal policy recommendations
  - Fiscal policy should play the primary role in addressing distributional impacts and pre-existing structural issues.
  - Remain sufficiently accommodative in the near term to ensure a successful transition from public to private demand and limit scarring.
  - Carefully calibrate the pace of fiscal normalization to support employment and minimize bankruptcies of distressed but viable firms.
  - Authorities should stand ready to deploy additional fiscal support if the recovery falters, including additional public investment and targeted income and liquidity support measures.
  - Contingency measures to manage resurgence events are welcome and help mitigate uncertainty for businesses and workers.

- Monetary policy recommendations
  - Maintain accommodative monetary policy and liquidity provision; be prepared to provide additional monetary stimulus if necessary.

*International Monetary Fund*

### 20.      The shift from job retention to active labor market policies is appropriate. While the

### 1nzlea2021001 - 20.      The shift from job retention to active labor market policies is appropriate. While the

### Labor market policy and social protection
- The wage subsidy program played a central role during the acute phase of the crisis; moving to active labor market policies (ALMPs) — including free training programs and expansion of hiring subsidies (“Flexi-wage” subsidies) — will facilitate labor reallocation.
- Given New Zealand’s low spending on ALMPs in international comparison, a further expansion of such policies should be considered, focusing on workers disproportionately affected by the pandemic, including youth, low-skilled workers, women, and some ethnic groups.
- The permanent increase in unemployment benefits from a relatively low level is welcome and will strengthen automatic stabilizers.
- The recent increase in the top income tax rate from 33 to 39 percent will help finance the permanent increase in unemployment benefits and mitigate growing inequality.
- Staff recommendation: broaden coverage of training programs to reflect industry needs; use the Reform of Vocational Education to enhance effectiveness; target support to displaced workers to limit scarring and foster employability.

### Fiscal position and debt sustainability
- New Zealand’s public debt has remained low compared to advanced economy peers, with net government debt projected to peak at 29 percent of GDP in FY2023/24.
- The Debt Sustainability Assessment suggests New Zealand’s debt trajectory will remain sustainable under stress scenarios, leaving substantial fiscal space to address future shocks.
- Staff supports the suspension of the authorities’ debt target to provide additional flexibility to respond to the economic impact of the pandemic.
- Authorities intend to stabilize net debt as a percent of GDP by the mid-2020s and then reduce it as conditions permit; they will review the public debt anchor once pandemic-related uncertainty subsides.

### Monetary policy
- Monetary policy should remain accommodative for an extended period; premature tightening should be avoided given remaining slack and muted inflation and wage pressures.
- The RBNZ has scope for additional easing, potentially including moderately negative interest rates, if downside risks materialize.
- Conversely, if the recovery is stronger-than-expected, an earlier-than-planned tapering of bond purchases could be considered.
- Monetary policy should remain strictly focused on its existing inflation and employment objectives; avoid overloading monetary policy with potentially conflicting objectives, including housing affordability.
- Financial stability risks from surging house prices should be addressed primarily through macroprudential measures; affordability should be supported by fiscal and structural measures.

### Financial sector resilience and macroprudential policy
- Rapid increase in riskier housing loans may point to rising financial vulnerabilities: as investor lending picked up, high-LVR loans increased rapidly, while the share of interest-only loans to investors remained high at around 40 percent.
- The RBNZ re-imposed LVR restrictions from March 2021 at pre-pandemic levels, with further tightening of investors’ LVR restrictions from May 2021: limits of a maximum of 20 percent of new lending to owner-occupiers at LVRs above 80 percent, and 5 percent of new lending to investors at LVRs above 70 percent (reduced to 60 percent from May 2021).
- The planned rise in bank capital requirements from 10.5 to 16 percent of risk-weighted assets (18 percent for the four large banks) over seven years starting from July 2020 has been postponed; the starting date has been postponed to July 2022.
- Interim RBNZ stress tests suggest banks’ existing capital positions would withstand severe but plausible economic shocks.
- Staff recommendations:
  - Continue to maintain ample liquidity in the financial system until the recovery is well established.
  - Keep macroprudential tools readily available; reinstatement of LVRs and further tightening for investors will help mitigate stability risks.
  - Consider additional tools when necessary: debt-to-income (DTI) ratio limits, caps on interest-only loans, and higher bank capital risk weights on mortgage lending.
  - Address any adverse distributional consequences of macroprudential policies through fiscal and structural policies.
  - Reconsider the relatively low deposit insurance coverage at NZ$50,000 per depositor per institution.

### Regulatory reform and supervisory capacity
- Phase 2 Review of the RBNZ Act is under way to modernize governance and accountability, harmonize prudential regulation between banks and non-bank deposit takers, strengthen supervision and enforcement tools, clarify crisis resolution framework, and introduce a deposit insurance scheme.
- Draft RBNZ Bill introduced in 2020, to be followed by a new Deposit Takers Bill later this year.
- Staff view: Phase 2 is an opportunity to ensure the RBNZ has adequate operational autonomy and full macroprudential toolkit.

### Housing sector imbalances and policy responses
- Structural imbalances from insufficient supply accumulated over past decades have been amplified by record-low mortgage rates and temporary removal of LVR restrictions, pushing up house prices against tight housing inventory.
- The government’s late-March housing package aims to curb investor demand and increase housing supply, including:
  - Removing tax deductibility for mortgage interest of property investors (tax deductibility will cease at the end of September 2021 for newly purchased investment properties (except for newly built properties), while being phased out over four years for properties bought before March 27, 2021); owner occupiers are not affected.
  - Extending the minimum holding period to exempt capital gains on investment properties from income tax (minimum holding period will be extended from five to ten years for newly-acquired properties (except newly built homes and owner-occupier homes)).
  - Increasing government support for first-home buyers (Income and property price caps are revised upward under the existing First Home Grant and First Home Loan schemes).
  - Providing a NZ$3.8 billion Housing Acceleration Fund and supporting Kāinga Ora to borrow an additional NZ$2 billion for strategic land purchases.
- Staff assessment:
  - Demand-side measures, particularly change in deductibility of mortgage interest, can materially affect attractiveness of property investment and improve affordability for owner-occupiers.
  - Supply-side measures, including the Housing Acceleration Fund, can help unlock housing supply; quick and efficient implementation will be important.
  - Tackling long-term affordability requires freeing up land supply, improving planning and zoning, fostering infrastructure investment, increasing social housing stock, and reforming the RMA to reduce complexities in land use planning.

### Structural policies to promote durable, inclusive, and green growth
- New Zealand faces long-standing structural challenges, including weak productivity growth, low inward FDI, weak capital deepening, and infrastructure gaps.
- The pandemic has aggravated inequality and labor-market scarring risks, especially for youth and some ethnic groups.
- Staff recommendations:
  - Scale up innovative investment and R&D spending; recently introduced R&D tax credits can support private innovative investment; scale up government R&D spending and expand capacities of Crown Research Institutes.
  - Reduce entry barriers and simplify administrative processes to strengthen competition; improve state-owned enterprises’ performance.
  - Upgrade infrastructure and step up green investment; use “shovel-ready” projects to narrow infrastructure gaps and direct investment towards low-emissions infrastructure and technology.
  - Facilitate worker reallocation with ALMPs focused on displaced workers and broaden training program coverage to match industry needs.
  - Reform the Overseas Investment Act to streamline FDI approval, attract higher-quality FDI, and deepen global connectivity; government’s intention to use the newly introduced national interest test sparingly is welcome.

*Source: 1nzlea2021001 - 20.      The shift from job retention to active labor market policies is appropriate. While the*

### 47.      The authorities concurred that structural policies are central for lifting medium-term

### 1nzlea2021001 - 47.      The authorities concurred that structural policies are central for lifting medium-term

### Structural policies and productivity
- Authorities concurred that structural policies are central for lifting medium-term growth and saw weak productivity performance as an important issue requiring a multifaceted approach.
- Policy measures noted by the authorities:
  - R&D tax credits had recently been strengthened.
  - Ongoing efforts to improve the quality of government R&D spending.
  - Active labor market policies recently introduced to support displaced workers.
  - Higher infrastructure spending to help reduce the existing infrastructure gap.
  - Limited near-term scope for scaling up green investments because projects are still in early planning stages.
  - Intention to use the new national interest test for FDI sparingly; no proposed project had been rejected since introduction of the test in May 2020.
  - Simplification of the FDI approval process implemented with the adoption in 2020 of the Urgent Measures Bill; significant additional steps planned in the context of the ongoing reform of the Overseas Investment Act.

### Labor market and human capital
- Authorities agreed with staff’s views on labor market policies.
- Emphasis on active labor market policies as an important step to support displaced workers.
- Staff recommendation: Active labor market policies should focus on supporting displaced workers and disadvantaged groups, while promoting reallocation of resources and long-term human capital accumulation.

### Fiscal policy and macroeconomic stance
- Staff appraisal highlights:
  - New Zealand weathered the COVID-19 pandemic shock well; public health measures suppressed the virus and the policy response cushioned macroeconomic and financial effects.
  - The policy response sustained financial stability and enabled a fast recovery after initial stringent domestic public health measures were lifted.
- Near-term policy guidance:
  - The need for additional stimulus has waned under the baseline, but a premature withdrawal of support should be avoided.
  - The policy mix should remain accommodative; fiscal and monetary policy measures should not be withdrawn in the near term.
  - The pace of normalization should be state-contingent and calibrated to economic and financial developments.
- Fiscal specifics:
  - Fiscal policy should remain sufficiently accommodative in the near term to ensure a successful transition from public to private demand and limit scarring.
  - The expiry of some COVID-related fiscal support measures implies a moderate tightening of the structural fiscal balance from FY2021/22.
  - Current plans are adequate considering New Zealand’s faster-than-expected economic recovery, but authorities should stand ready to deploy additional fiscal support should the recovery falter.
  - New Zealand’s debt trajectory is expected to remain sustainable, with substantial remaining fiscal space that can be deployed in case of future shocks.

### Monetary and financial sector policy
- Monetary policy:
  - Monetary policy should remain accommodative for an extended period and be data dependent.
  - The RBNZ could implement further monetary stimulus, potentially including negative interest rates, if downside risks materialize.
  - Conversely, should the recovery proceed at a stronger-than-expected pace, an earlier-than-planned tapering of bond purchases could be considered.
- Financial sector resilience:
  - The banking system has remained well-capitalized and liquid.
  - Financial risks may increase from potential deterioration of loan portfolios as relief measures are unwound, given banks’ concentrated exposure to residential mortgage lending and elevated household debt.
  - Macroprudential tools should be readily available to address housing-related macrofinancial risks.
  - The ongoing Phase 2 Review of the RBNZ Act aims to further strengthen governance and operational autonomy and offers an opportunity to ensure the RBNZ has the full macroprudential policy toolkit.

### Housing imbalances and policy recommendations
- Staff supports a comprehensive approach to tackling housing imbalances.
- Mitigating housing demand, particularly from investors, will help moderate price pressures and address affordability concerns.
- Achieving long-term housing affordability depends critically on:
  - Freeing up land supply.
  - Improving planning and zoning.
  - Fostering infrastructure investments to enable fast-track housing developments.

### External position and structural growth orientation
- The external position is broadly consistent with economic fundamentals and desired policy settings; the narrowing of the current account deficit and the depreciation of the real exchange rate since 2017 supports staff’s assessment.
- Structural policy priorities:
  - Expand R&D spending and product market reforms to accelerate productivity growth.
  - Use the ongoing reform of the Overseas Investment Act to streamline the foreign direct investment approval process and deepen connectivity with global markets.
  - Orient infrastructure spending to reduce the existing infrastructure gap and seize opportunities to orient investment towards low-emissions infrastructure and technology during the recovery.

### Other recommendations and scheduling
- It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Box: New Zealand’s success in fighting the COVID-19 battle (summary)
- Policy actions:
  - Shortly after the first COVID-19 case, New Zealand introduced a four-level alert system, declared a state of emergency, and moved to the most restrictive Alert Level 4 lockdown.
  - Strategy focused on speedy testing, contact tracing, and isolation; local transmission was eliminated by June 2020.
  - By that time, New Zealand carried out 10,000 tests per day, and contact tracers alerted anyone who had close interactions if a case was confirmed.
  - Authorities closed non-essential businesses, cancelled events and gatherings, closed education institutions, and closed the border to non-residents; returning residents required to enter into two-week supervised quarantine from April 2020.
  - After suppression, New Zealand moved to Alert Level 1 in June 2020, lifting many restrictions while maintaining strict travel restrictions and quarantine requirements; two episodes of localized resurgence prompted temporary lockdowns in Auckland.
- Note: New Zealand has a 4-level Alert system.

### Box: House-Prices-at-Risk in New Zealand (summary)
- House price developments and risks:
  - House prices increased sharply since the onset of the pandemic, with 12 percent y/y nominal increase in 2020Q4 under a low-interest-rate environment and continued supply-demand imbalances.
  - Staff estimates point to some downside risks to New Zealand’s house prices; House-price-at-risk (HaR) has deteriorated in previous recessions in New Zealand.
  - In 2020Q2, downside risks increased sharply amid the severe lockdown and sizable economic slowdown. Despite the rebound in the second half of 2020, downside risks remain while some upside risks are also emerging.
  - Conditional on 2020Q4 economic conditions, real house prices in New Zealand would fall by 12 percent over the next four quarters with a 10-percent likelihood.
  - This estimation does not incorporate possible impacts of the housing measures announced in March 2021.

*Source: 1nzlea2021001 - 47.      The authorities concurred that structural policies are central for lifting medium-term (PDF chapter/section).*

### Box 3. New Zealand House Prices and Affordability

### Box 3. New Zealand House Prices and Affordability

### Attainable housing price indicator and methodology
- Attainable housing price indicator approximates affordability by the maximum mortgage loan a household can obtain given its income, prevailing mortgage rate, and leverage requirements (borrowing capacity approach).
- Assumptions used to estimate attainable house prices:
  - Affordable housing cost assumed in the conventional range of a debt service to household income ratio (DSTI) of 25 to 40 percent.
  - Mortgage rate: 1-year fixed average residential mortgage rate (monthly).
  - Loan type: principal and interest loan of 30-year maturity.
  - Loan-to-value ratio up to 80 percent with a down payment of 20 percent.
  - Income: average annual household disposable income by fiscal year end (end-June).
  - Actual house prices: median value of dwellings in June of each year reported by RBNZ.
  - For “2021”, estimates are based on December 2020 house prices and interest rates, and projected average household disposable income (increased by 1.5 percent y/y).

### Key findings on affordability (December 2020)
- Actual median house prices in New Zealand were about 22 percent higher than house prices attainable under a 30-percent DSTI in December 2020.
- Mortgage rates declined by 127 bps for one-year fixed rate since mid-2019.
- The surge in house prices in H2 2020 widened the affordability gap despite the decline in mortgage rates.
- Auckland-specific findings:
  - Median house prices in Auckland are close to 40 percent higher than the national average.
  - In December 2020, Auckland median house prices were 11 percent higher than attainable house prices under a DSTI of 40 percent.
  - Without the cut in interest rates, the affordability gap in Auckland would have been about 30 percent (including the blue bars referenced in the source).

### Economic and social implications
- Housing affordability is becoming an increasing concern amid rising house prices.
- The rapid rise in the house price-to-income ratio risks putting home ownership out of reach for many households.
- It will take significantly longer for a first-time home buyer to save for a 20 percent cash deposit against rising house prices and low deposit rates.

*Source: IMF staff calculations and Reserve Bank of New Zealand data as described in the Box’s methodology.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overview
- Based on preliminary estimates, New Zealand’s external position in 2020 was broadly in line with fundamentals and desired policy settings.
- The change from the previous assessment (when it was seen as weaker than implied by fundamentals and desirable policies) stems from the significantly lower current account deficit and the depreciated real exchange rate.

### Current account, NIIP, and 2020 developments
- New Zealand has historically run current account (CA) deficits, averaging close to 4 percent of GDP over the past few decades.
- These deficits produced a sizable negative net international investment position (NIIP):
  - NIIP narrowed slightly to -53.7 percent of GDP at the end of 2019.
  - NIIP rose to -55 percent in 2020.
- The CA deficit narrowed significantly in 2020 due to:
  - Both real exports and imports declined, with weaker domestic demand having a proportionately larger impact on real imports.
  - Overall terms of trade improved.
  - The primary income deficit narrowed as the interest rate on foreign liabilities declined during the year.
  - Portfolio flows increased significantly, drawn by New Zealand’s strong performance during the pandemic.

### REER, exchange rates, and model-based assessments
- REER and interest differential movements:
  - New Zealand’s REER declined from some 13 percent above its long-term average in 2017 to just over 3 percent by end-2020.
  - The depreciation mirrors the declining interest differential, which had turned negative in 2018, and likely reflects slowing economic activity in 2019.
  - Since 2020Q3, both the real and nominal exchange rate appreciated somewhat, partially reversing some of the depreciation since 2017.
- EBA current account regression:
  - The estimated cyclically-adjusted CA norm for 2020 was -1.1 percent of GDP.
  - The actual cyclically-adjusted CA balance for 2020 was -1.4 percent of GDP.
  - This implies an estimated CA gap of -0.3 percent of GDP.
  - Applying the EBA-estimated elasticity of the current-account-to-GDP ratio with respect to the REER of -0.23 to this gap results in an estimated currency overvaluation of around 1.4 percent.
- EBA REER regressions and external sustainability:
  - The EBA REER level regression suggests the real exchange rate was in line with fundamentals in 2020.
  - Results from the REER index regression deviate significantly from the other EBA methodologies.
  - The External Stability (ES) approach suggests NIIP would be stabilized at current levels with a CA deficit of 2.9 percent of GDP.
  - Comparing the ES implication to the cyclically-adjusted CA deficit for 2020 (1.4 percent) implies the currency is estimated to be undervalued by around 6.4 percent.
- Model consensus:
  - Taken together, the models indicate the external position is broadly in line with fundamentals and desired policy settings.
  - The models indicate an average undervaluation of around 0.3 percent.
  - On balance, the current account model is considered likely to provide a reliable assessment of the external position, especially with multilaterally consistent adjustors for the pandemic’s temporary impact.

### Structure of external balance sheet and vulnerabilities
- Structure reduces vulnerability associated with large negative NIIP:
  - External NIIP liabilities are mainly in New Zealand dollars and 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.
  - Temporary provision of significant domestic funding to commercial banks from the RBNZ in response to the pandemic has largely eliminated the need for banks’ external financing.

### Uncertainty and other considerations
- There is an unusually high level of uncertainty surrounding the current assessment.
  - It is possible the compression of the current account in 2020 had a larger transitory component than implied by the cyclical adjustment; revisions may follow as more information becomes available.
- Exchange rate regime and past interventions:
  - 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.
  - Authorities are strongly committed to a floating regime, which reduces the need for reserve holding.

*Source: Annex I. External Sector Assessment (extracted content).*

### 2.      The reform aims to strengthen governance and accountability of the monetary and

### 2.      The reform aims to strengthen governance and accountability of the monetary and

### Strengthening governance and accountability: overview
- The RBNZ Bill will add an overarching financial stability objective.
- A Financial Policy Remit, issued by the Minister of Finance, sets out matters the Board must have regard to when making decisions in relation to financial stability and prudential standards (replaces the current direction under section 68B of the Reserve Bank Act).
- The reform intends to more effectively balance operational autonomy of the Reserve Bank with appropriate accountability and democratic oversight.
- Decision-making will move from a single decision-maker model centered on the Governor to a new Board, comprised of all non-executives, which will be responsible for all oversight, policy-making, and regulatory decisions, except for monetary policy, which remains reserved for the Monetary Policy Committee (MPC) with executives in majority.
- Changes to the funding model would allow for appropriate recovery of costs on financial regulatory functions through industry levies and fees.
- The RBNZ’s accountability and reporting frameworks will be changed to align more closely with those of Independent Crown Entities.
- The Council of Financial Regulators is provided with a statutory basis to facilitate cooperation and coordination in financial sector regulation between council members.
- The Bill also provides increased accountability and transparency of the Reserve Bank’s financial risk management and use of foreign reserves.

### Assessment and recommended clarifications
- The reform provides an opportunity to further strengthen the RBNZ’s governance framework and autonomy.
- A revision of the Board structure in the bill is advisable for better coordination between monetary policy and financial policies, and to help the management of trade-offs.
- A transparent Financial Policy Remit is likely to have net benefits and could help strengthen the macroprudential framework.
- To enhance the proposed safeguards and minimize risks to supervisory autonomy adequately, the Bill could:
  - clarify that matters included in a remit are for the RBNZ’s own understanding of its financial stability objective; and
  - provide the RBNZ an explicit opportunity to disclose to the public how it intends to react to the remit.
- Empirical support: the U.K. experience with the financial policy committee remit has supported the effectiveness of macroprudential policy.
- Despite some improvements, the RBNZ Bill also carries over a range of provisions that can impact on the functional, institutional, and personal autonomy of the RBNZ.
- The current reform provides an opportunity to review these provisions in view of their links to objectives, governance, and remit powers in order to further enhance the RBNZ’s operational autonomy.

### Annex VI — Follow-Up on Key Recommendations of the 2017 FSAP: Financial stability and sector resilience (selected updates)
- Increase RBNZ resources for supervision and regulation of banks, insurance companies, and FMIs.
  - Time Frame: ST
  - Update: Completed. A new funding agreement signed in June 2020 provides the RBNZ with an average of NZ$115 million a year (up about $35 million) for its operations over five years from July 2020, to support a more intensive supervisory model.
- Strengthen cooperation and collaboration arrangements with Australian authorities.
  - Time Frame: ST
  - Update: In process. Completed a hypothetical bank crisis simulation exercise in September 2017; follow-up communications coordination exercise being planned. The RBNZ Bill contains a new cooperation function including ‘overseas central banks and relevant international institutions’. Trans-Tasman cooperation provision (s.68A) will be carried across to the Deposit Takers Act (DTA).
- 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: In process. Governance and prudential options examined in Phase 2 Review. A new financial stability objective and a Financial Policy Remit will be introduced. The RBNZ Bill will designate Treasury as the formal monitor of the RBNZ on behalf of the Minister of Finance. The DTA will further clarify Minister’s role in crisis management.
- Issue enforceable standards on key risks, governance, risk management, and controls.
  - Time Frame: ST
  - Update: In process. Cabinet agreed that prudential requirements for deposit takers will be set through ‘standards’ as a secondary legislative instrument aligned broadly with Basel Core Principles (BCPs).
- Review and extend the enforcement regime, including eliminating ministerial consent for directions.
  - Time Frame: MT
  - Update: In process. Phase 2 Review examines options. Cabinet made an in-principle decision to widen the enforcement toolkit and remove the requirement for Ministerial consent to issue directions.
- Initiate on-site programs to test pillars and directors’ attestations.
  - Time Frame: ST
  - Update: In process. A team formed for cross-cutting review. Cabinet made an in-principle decision empowering the RBNZ to undertake on-site inspections of deposit takers and insurers.
- Refinements to Financial Markets Authority (FMA) supervision (asset management monitoring, supervisor quality, insurance intermediary conduct).
  - Time Frame: I / In process
  - Updates include redemption/liquidity stress testing in 2020, thematic supervisory reviews, a new financial advice conduct regime effective March 15, 2021 (full license required from March 2023), and proposed expansion of conduct regulation for retail banks, insurers, and non-bank deposit takers.
- Expand FMA perimeter to custodians and wholesale asset managers.
  - Time Frame: ST
  - Update: In process. The FMA received an outsourced thematic on custodial arrangements and is considering a regulatory regime for custodians.
- Adopt and implement proposed FMI legislation and PFMI implementation via standards.
  - Time Frame: I
  - Update: In process. The FMI Bill is before Parliament; PFMI to be implemented via standards in secondary legislation; FMI self-assessment frequency intended to change from three to two years once the FMI Bill is in force.
- Ensure designated nonfinancial businesses and professions are subject to AML/CFT requirements.
  - Time Frame: MT
  - Update: Completed. AML/CFT Amendment Act 2017 extends coverage: lawyers, conveyancers, trust and company services (from July 1, 2018); accountants (from October 1, 2018); real estate agents (from January 1, 2019).
- Expand data collection and modeling for credit risk in CRE and corporate portfolios.
  - Time Frame: MT
  - Update: In process. Current focus on embedding stress testing within the prudential framework.
- Macroprudential framework improvements: communication, transparency, accountability without jeopardizing independence.
  - Time Frame: C
  - Update: In process. RBNZ published a review of LVR policy experience and clarified purpose/strategy for macroprudential tools. Financial Policy Remit will enable Minister to articulate policy priorities. Phase 2 proposes macroprudential powers subject to general standard-setting framework and empower lending-standard tools (e.g., LVRs and DTIs).
- Introduce DTI measures in macroprudential toolkit and consider implementation if LVR changes insufficient.
  - Time Frame: I
  - Update: In process. Public consultation in June-August 2017 on serviceability restrictions. Minister requested further advice; RBNZ to report to the Minister in May on DTI restrictions and other measures.
- Increase capital buffer requirements to reflect concentration in four banks.
  - Time Frame: I
  - Update: Completed. The 2019 Capital Review required banks to raise minimum capitalization from 10.5 percent of risk-weighted assets to 18 percent for the four large banks and 16 percent for the remaining smaller banks in seven years, starting from by July 2020. In the context of the COVID-19 response, the target date has been extended to July 2022.
- Crisis readiness, management, and resolution: clarify roles, prepositioning, testing.
  - Time Frame: MT
  - Update: In process. Phase 2 designates RBNZ as Resolution Authority with broader powers. A Deposit Insurance Scheme (DIS) will be introduced. DTA will clarify Minister’s role. Amendment to Public Finance Act 1989 to enable Government to act quickly and use public funds in a financial crisis.
- Deposit insurance / depositor preference.
  - Time Frame: MT
  - Update: Partially done. Phase 2 decisions include introduction of deposit insurance with a $50,000 limit per person per institution, funded by a levy on deposit takers, with a Government backstop.
- Revise RBNZ Act for clarity in resolution objectives and authority.
  - Time Frame: MT
  - Update: In process. Phase 2 decisions include RBNZ as resolution authority with clear objectives and functions; widened resolution powers (e.g., statutory bail-in powers); and “no creditor worse off” provisions.

(Note: C = continuous; I (immediate) = within one year; ST (short-term) = 1–3 years; MT (medium-term) = 3–5 years.)

### Annex VII — Impact of the Pandemic on New Zealand’s Medium-Term Potential Output
- The pandemic is expected to have a sizable impact on medium-term growth.
- GDP rebounded strongly in the second half of 2020 after a sharp decline in 2020Q2, supported by strong pent-up demand, but the pandemic and continued border restrictions are expected to have a medium-term impact on trend growth.
- Past recessions in advanced economies suggest persistent effects on medium-term output, driven by productivity slowdown and reduced capital stock and labor input; on average, medium-term output remains 4½ percent below pre-recession after the crisis, with stronger effects in large recessions.
- In this crisis, lower labor input, weaker capital accumulation, and a productivity slowdown are expected to adversely affect potential output in New Zealand.
  - Net migration, a key driver before the pandemic, is expected to remain low while travel restrictions remain in place.
  - Shortage of skilled labor due to reduced migration is likely to adversely affect productivity, despite some offset from labor shifting to more productive sectors.
  - Heightened uncertainty, reduced labor input, and productivity slowdown are expected to adversely affect capital accumulation.
- The pandemic is expected to have scarring effects, with a 3¾ percent loss of potential output in the medium-term.
- Recommended efforts to limit scarring and lift potential output:
  - address pre-existing structural issues, including weak productivity performance, the infrastructure gap, and product market regulations.
- Note: The infrastructure spending gap is estimated to be between 8 and 23 percent of GDP.

### Annex VIII — The uneven impact of the pandemic on New Zealand’s labor market
- Overall labor market deterioration has been somewhat limited due to large-scale wage subsidies.
- Key statistics:
  - Unemployment rate: increased to 4.9 percent in 2020Q4 from 4.1 percent in 2019Q4.
  - Underutilization rate: increased to 11.9 percent in 2020Q4 from 10.1 percent in 2019Q4.
- The impact has been uneven:
  - Young workers, female workers, some ethnic groups, and low-skilled workers experienced more severe effects.
  - Youth employment saw the largest adjustment, with a 2.4 percentage point y/y increase in the youth unemployment rate.
  - Job losses concentrated in service sectors, contributing to a sharp increase in female unemployment and underutilization.

*Prepared with inputs from MCM and LEG.*

### 3.      Uneven labor market adjustment would lead to scarring and aggravate already

### 1nzlea2021001 - 3.      Uneven labor market adjustment would lead to scarring and aggravate already 

### Labor market scarring and inequality
- International experience suggests that youth unemployment could lead to scarring in the labor market, with a persistent increase in unemployment, which may also undermine long-term human capital accumulation.
- A more severe impact on some ethnic groups and low-skilled workers would aggravate inequality, which was relatively high even before the pandemic.
- Numerical/statistical highlights:
  - Agriculture accounts for the highest share of greenhouse gas emissions at 50 percent (contextual link to broader structural issues in the economy).
- Note: low spending on active labor market policies is driven partly by relatively low unemployment rate in recent years.

### Active labor market policies (ALMPs) — findings and recommendations
- Findings:
  - Government spending on active labor market policies has been relatively small compared to other advanced economies, indicating scope for scaling up spending to address emerging labor market issues.
- Policy recommendations / measures to deploy:
  - Focus on policies to support displaced workers and facilitate sectoral labor reallocation, including:
    - Targeted hiring subsidies.
    - Training.
    - Job search assistance.
  - Scale up spending on active labor market policies given the relatively small historical outlays.
- Existing government actions (already undertaken):
  - Expanding support, including Flexi-wage subsidies.
  - Providing free access to training courses.
  - Reform of the training systems.

### Transformation to a green and digital economy — green recovery
- Strategic objective:
  - The COVID recovery provides an immediate opportunity for government policies to build a low-emissions and more digitalized economy that supports sustainable and durable economic growth.
- Green recovery findings:
  - New Zealand ranks high among advanced economies on greenhouse gas (GHG) emissions.
  - The largest share of emissions comes from agriculture (50 percent), largely from short-lived methane.
  - New Zealand has a strong institutional framework to address climate change, including through the Climate Change Response Act 2019 and the Emission Trading Scheme.
  - Decisive policy actions would help to close the large gap between projected emissions and a trajectory consistent with meeting New Zealand’s 2050 net zero carbon target and international targets under the Paris agreement.

### Green strategy components and timelines
- Broad strategy requirements:
  - Transition from fossil fuels to electricity.
  - Substantial afforestation.
  - Changes to the structure and methods of pastoral farming.
- Planned policy inputs and timing:
  - Release of the Climate Change Commission draft advice in February 2021.
  - Preparation of New Zealand’s first Emissions Budgets (mid-2021).
  - Preparation of the Emissions Reduction Plan (late 2021).
  - Preparation of the National Adaption Plan (late 2022).
- Policy opportunity:
  - The post-COVID-19 recovery offers opportunities for re-orientation of both public and private investment towards low-emissions infrastructure and technology, in the context of the government’s efforts to step up public investment.

*Source: 1nzlea2021001, International Monetary Fund.*

### 3.      Digitalization. The pandemic has

### 3.      Digitalization. The pandemic has

### Digital infrastructure and connectivity
- New Zealand has expanded digital infrastructure under the Ultra-Fast Broadband Programme and the Rural Broadband Initiative, with 83 percent of the population to date covered by fibre-to -the-home networks.
- Despite recent progress, a gap to the international frontier remains.
- To facilitate the digital transition and improve global competitiveness, policies should focus on:
  - fostering digital skills,
  - enhancing the digital infrastructure and its safety,
  - promoting the broader uptake of technology across the economy.
- The Small Business Digital Boost has been introduced to promote the digital transformation of SMEs.

### Cybersecurity risks and recent incidents
- The authorities should address growing cyber threats amid continued digitalization.
- Recent cyberattacks affecting the RBNZ and New Zealand’s stock exchange highlight the need to strengthen cyber resilience.
- The RBNZ published guidance on cyber resilience that:
  - applies to all entities that the RBNZ regulates,
  - provides high-level principle-based recommendations,
  - serves as an overarching framework for governance and management of cyber risk adaptable to specific needs and technologies.

### Policy recommendations and priorities
- Foster digital skills across the workforce to support adoption of internet-based and bandwidth-intensive activities.
- Enhance digital infrastructure quality and coverage to close the gap to the international frontier.
- Strengthen cyber security and resilience across public and private sectors, including financial sector entities.
- Promote broader uptake of technology across firms, including targeted support for small firms (e.g., Small Business Digital Boost).

### Related economic context (implications for digitalization)
- The pandemic accelerated internet-based and bandwidth-intensive activities, increasing demand for high-quality connectivity and stronger cyber security.
- Digitalization is part of broader structural and policy priorities aimed at improving productivity, competitiveness, and the recovery from COVID-19.

*Source: International Monetary Fund, Staff Report for the 2021 Article IV Consultation—Informational Annex.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1nzlea2021001.pdf_