## _cr09248

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### Executive summary: key findings and outlook
- Real activity expected to decline by ½ percent in 2009.
- Growth projected to pick up to about 1½ percent in 2010, led by government spending.
- Main risk: uncertainty about the strength and timing of the recovery in Australia’s trading partners.
- Fiscal: underlying cash balance projected to shift into a deficit of almost 5 percent of GDP in 2009/10.
- Policy guidance:
  - Monetary policy should be the first line of defense; scope to cut policy rate further if growth and inflation weaken.
  - Given low public debt, scope exists for further fiscal stimulus if the outlook weakens, but with a medium-term objective to return to budget surpluses.
- Monetary policy assessment:
  - Easing since late 2008 was appropriate; current stance judged appropriate.
- Financial stability:
  - Banks coped well due to robust supervision and regulation.
  - Banks remained profitable and raised private equity in early 2009 but face significant risks from sizable short-term wholesale funding.
  - Wholesale funding and retail deposit guarantees and RBA liquidity actions helped maintain stability.
  - Staff recommended further stress tests using more extreme scenarios than in the 2006 FSAP; preliminary analysis suggests large banks’ capital would remain above regulatory minimums under a sizable downside shock.

### Pre-crisis strengths and crisis-era vulnerabilities
- Strengths at onset:
  - 17 years of continuous growth supported by sound macroeconomic policies and structural reforms.
  - Terms of trade at highest level in more than half a century.
  - Commonwealth government had eliminated net debt; corporate and bank leverage relatively low.
- Immediate impacts from Lehman Brothers (September 2008):
  - Key commodity prices fell sharply; domestic money markets came under stress; offshore funding tightened.
  - Currency depreciated and equity prices plunged.
- Vulnerabilities highlighted:
  - Household debt over 150 percent of disposable income in 2008.
  - Short-term external borrowing over 50 percent of GDP in 2008.
  - Unemployment increased, though less than in many other advanced countries.

### Financial markets, real economy, inflation, and credit
- Financial market developments:
  - Short-term money market spreads and CDS spreads widened significantly in late 2008, then partially recovered.
  - Financial stress index spiked in late 2008, then eased below levels in Canada, the United Kingdom, and the United States.
  - Equities and the currency fell sharply; business and consumer confidence collapsed and later showed signs of recovery.
- Real sector outcomes:
  - Real GDP growth eased to 2.3 percent in 2008 and 1½ percent in 2009 Q1 (saar).
  - Business investment fell by 23 percent in 2009 Q1 (saar).
  - Net exports increased as imports declined; export volume growth remained positive in 2009 Q1.
  - Manufacturing value added fell sharply but comprises less than one-tenth of total output.
- Inflation and resource utilization:
  - Capacity utilization declined sharply; unemployment rose by almost 2 percentage points from its trough in early 2008.
  - Headline CPI inflation was 1½ percent year-on-year in the June quarter—below the RBA target band of 2–3 percent on average over the cycle.
  - Inflation expectations and private-sector wage growth moderated.
- Credit and household balance sheets:
  - Credit growth slowed; mortgage rate reductions and a first-time homebuyers’ subsidy supported housing credit demand while business and other personal credit contracted.
  - Household debt-to-income declined slightly since mid-2008; household debt-service ratio fell further because of large drops in mortgage interest rates.

### Banking sector condition, funding, and fiscal position
- Banking sector condition:
  - Returns on equity were "15–20 percent" before the crisis.
  - Tier 1 capital ratios of 7–8 percent in 2007; improved to "over 8 percent" after raising common equity.
  - Low exposure to securitized assets and structured finance products.
  - Low-doc mortgages comprise "7 percent of total mortgages"; nonconforming mortgages comprise "an additional ½ percent of total mortgages."
- Asset quality and capital:
  - Past due loans and impaired assets were "1½ percent of assets in March 2009."
  - Profitability fell due to increased provisioning but remained "healthy" relative to earlier levels.
  - Bulk of Tier 1 capital is common equity.
- Funding, guarantees, and liquidity:
  - About half of banks’ funding comes from the wholesale market.
  - Wholesale funding guarantees (October 2008) enabled banks to raise "$A 140 billion" in longer-term funding in the subsequent seven months.
  - Financial institutions’ short-term external debt (residual maturity) was about "$A 400 billion (35 percent of GDP)" in March 2009 (staff estimate).
  - Financial Claims Scheme (October 2008) guarantees retail deposits up to "$A 1 million."
- Broader financial sector impacts:
  - Securitization activity fell sharply; stock of RMBS and ABCP outstanding was about "$A 160 billion in March 2009," about "40 percent below the peak of mid 2007."
  - RMBS and ABCP small compared with total financial sector credit of "$A 1,900 billion."

- Fiscal position and policy response:
  - Commonwealth ran surpluses of "around 1–1¾ percent of GDP" in the six years to 2007/08; net debt eliminated.
  - For 2008/09, underlying cash deficit estimated at "2.7 percent of GDP."
  - Consolidated nonfinancial public sector deficit rose to "5¾ percent of GDP in 2008/09" when states and public corporations’ investment spending included.

### Outlook, scenarios, and macro projections
- Near-term growth outlook:
  - Aggressive policy action expected to limit decline in activity to "½ percent in 2009."
  - Staff baseline projects private consumption stagnant in 2009; private investment to fall sharply.
  - Growth projected to reach "1½ percent in 2010," led by government infrastructure spending.
  - Unemployment projected to rise to "7½ percent in 2011."
  - By 2014, GDP projected to be "about 5 percent lower than implied by the precrisis trend."
- Terms of trade:
  - Projected by staff to remain "more than 40 percent above the average for the 1990s."
- Risks:
  - Downside: prolonged weak world economy, sharper deterioration in banks’ asset quality, or loss of investor confidence in banks or the sovereign (noted as highly unlikely given low public debt).
  - Upside: stronger-than-expected demand from China; greater responsiveness to existing policy stimulus.
- Authorities’ view (May 2009 Budget): faster recovery with growth reaching "4½ percent by 2011/12" and a smaller permanent output loss than staff projections.

### Box 1 scenario (GIMF): Slower world recovery — design, effects, and policy implications
- Model and shock:
  - Simulation model: Global Integrated Monetary and Fiscal Model (GIMF).
  - External growth impact reduces growth in the world outside Australia by roughly 2 percentage points in each of the first three years.
  - Temporary increase in Australia’s currency risk premium of almost 200 basis points (half flows through to market interest rates).
- Real economy and commodity effects:
  - Shock reduces level of real GDP in Australia by 3 percent after three years.
  - Slower world growth reduces commodity prices by roughly 20 percent.
- Interest rates and inflation response:
  - Policy rate declines by almost 300 basis points; part of the cut not passed through to lending rates owing to higher risk premium.
- Fiscal outcomes:
  - Fiscal balance moves into deficit for five years.
  - Government debt rises by almost 7 percent of GDP at its peak.
- Staff policy advice from simulation:
  - Monetary policy first line of defense; further fiscal stimulus increases government debt.
  - Given low public debt, scope exists for further fiscal stimulus if outlook weakens; impact on growth highest for public investment spending; targeted transfers to low-income households have fast impact.
- Fiscal stimulus implemented (discretionary measures since September 2008):
  - 0.8 percent of GDP in 2008.
  - 2.9 percent of GDP in 2009.
  - 2 percent of GDP in 2010.
- Staff estimate: stimulus will raise real GDP by about 3 percent relative to baseline in 2009 and 2010; alternative calibrations give a cumulative impact range of 5¼–12¾ percent over 2008–12.

### Exchange rate, external position, and external debt risks
- Exchange rate assessment:
  - Range of indicators suggest the currency broadly in line with fundamentals.
  - Fall from mid 2008 to early 2009 driven by decline in commodity prices and loosening of monetary policy.
  - Box 3 results:
    - MB approach: equilibrium current account deficit about 4½ percent of GDP; implies a small undervaluation of about 4 percent.
    - ERER approach: implies overvaluation of about 5 percent in 2014 relative to June 2009 REER (assuming weakening terms of trade in 2009).
    - ES approach: implies overvaluation of less than 10 percent if NFL stabilizes at about 46 percent of GDP; less than 5 percent if NFL stabilizes at end-2008 level of 60 percent of GDP.
    - Estimates subject to considerable uncertainty.
- Current account and projections:
  - Staff forecasts current account deficit around 3½ percent of GDP in 2009.
  - Income balance projected to narrow by about ½ percent of GDP in 2009.
  - Staff projects net foreign liabilities to increase to 70 percent of GDP by 2014 (assuming current account deficits of about 4 percent of GDP).
- External debt structure and vulnerabilities:
  - Short-term external debt (residual maturity) comprises almost half of external debt and is relatively high by advanced country standards.
  - Most short-term debt matures in 90 days or less; almost 70 percent of total external debt is held by financial institutions.
  - March-09 figures (gross external debt):
    - Gross external debt (A$ billions): June-08 1,100; Dec-08 1,260; Mar-09 1,227.
    - Short term (A$ billions): June-08 524; Dec-08 610; Mar-09 595.
    - Gross external debt (US$ billions): June-08 1,059; Dec-08 873; Mar-09 844.
    - Short-term (US$ billions): June-08 504; Dec-08 423; Mar-09 409.
    - US$/A$ (end of period): June-08 0.96; Dec-08 0.69; Mar-09 0.69.
  - Almost 40 percent of gross foreign debt is in Australian dollars; half of the remainder in U.S. dollars.
  - Survey data suggests bulk of foreign-currency-denominated debt is hedged.
- Financial sector resilience and recommendations:
  - Proposed liquidity guidelines should encourage less reliance on short-term wholesale funding.
  - If rollover problems occur, banks have access to RBA liquidity facilities, including discounting mortgages; increased domestic liquidity would lead to exchange rate depreciation.
  - APRA regularly undertakes stress tests; future tests should use more extreme scenarios and consider spillovers from New Zealand and United Kingdom subsidiaries (equivalent to about ⅓ of Australian GDP).
  - Prudential judgment should assess adequacy of capital buffers; raise capital requirements if necessary.

### External debt sustainability bound tests — key figures and scenarios
- Gross external debt (percent of GDP) box figures:
  - Historical: 83
  - Baseline: 115
  - CA shock: 124 (box figure); Baseline: 115 (box figure)
  - Combined shock: 125 (box figure); Baseline: 115 (box figure)
  - Real depreciation shock (30% depreciation): 125 (box figure); Baseline: 115 (box figure)
- Real depreciation shock assumes foreign exchange hedging covers 79 percent of foreign currency debt.

### Key statistical and projection tables (selected exact figures)
- Nominal GDP (2008): $A 1,183 billion (US$1,012 billion)
- Population (December 2008): 21.6 million
- GDP per capita (2008): US$47,204
- Unemployment rate (June 2009): 5.9 percent
- Selected macro indicators (percent changes and levels):
  - Real GDP (percent change): 2006: 2.8; 2007: 4.0; 2008: 2.3; 2009: -0.5; 2010: 1.5
  - CPI inflation (percent): 2006: 3.5; 2007: 2.3; 2008: 4.4; 2009: 1.6; 2010: 1.5
  - Current account balance (percent of GDP): 2006: -5.3; 2007: -6.2; 2008: -4.3; 2009: -3.4; 2010: -3.4
  - Underlying cash balance (percent of GDP): 2006: 1.6; 2007: 1.6; 2008: 1.7; 2009: -2.7; 2010: -5.1
  - Net external liabilities (percent of GDP): 2006: 59.4; 2007: 60.3; 2008: 60.3; 2009: 65.8; 2010: 67.8
  - Tier I capital to risk-weighted assets: 2004: 7.6; 2005: 7.6; 2006: 7.4; 2007: 7.2; 2008: 8.2
  - Impaired assets to total assets: 2004: 0.3; 2005: 0.2; 2006: 0.2; 2007: 0.2; 2008: 0.8

### Policy appraisal and consolidated recommendations
- Policy sequencing and priorities:
  - Monetary policy remains effective and should be first line of defense; scope to ease further if needed.
  - Fiscal policy is an important complement; scope exists for additional targeted fiscal stimulus given low public debt, with a commitment to return to surpluses over the medium-term.
- Financial sector safeguards:
  - Continue and strengthen bank stress testing; use more extreme scenarios than in the 2006 FSAP.
  - Maintain and refine crisis preparedness measures, including liquidity provision frameworks and guarantees.
  - Implement prudential liquidity guidelines and monitor short-term external borrowing risks.
- Monitoring and risks:
  - Monitor household and external leverage: household debt over 150 percent of disposable income in 2008; short-term external borrowing over 50 percent of GDP in 2008.
  - Watch commodity prices and recovery in trading partner demand as key determinants of the near-term outlook.

*Source: IMF staff report, Executive Summary and selected Annexes (content unit _cr09248).*

### Executive Summary ......................................................................................................

### _cr09248 - Executive Summary ......................................................................................................

### Executive summary: key findings and outlook
- Following a prolonged expansion, global events slowed Australia’s economic growth well below trend. Declining commodity prices, tightening credit conditions in global capital markets, and slowing world growth reduced activity; the downturn was milder than in most other advanced countries because of strong commodity exports, a flexible exchange rate, a healthy banking sector, and a timely and significant policy response.
- Near-term outlook (staff projections and assessment):
  - Real activity expected to decline by ½ percent in 2009.
  - Growth projected to pick up to about 1½ percent in 2010, led by government spending.
  - The main risk to the outlook is uncertainty about the strength and timing of the recovery in Australia’s trading partners.
- Fiscal outlook and policy stance:
  - The weaker outlook for growth and commodity prices is projected to shift the underlying cash balance into a deficit of almost 5 percent of GDP in 2009/10.
  - Given the low level of public debt, there is scope for further fiscal stimulus if the outlook weakens; however, staff advised that monetary policy should be the first line of defense, as it remains effective.
  - Staff welcomed the authorities’ objective to return to budget surpluses over the medium-term and agreed that if trend growth or the terms of trade are not as high as assumed in the budget, further restraint on spending would be needed to return to surpluses over a horizon consistent with the authorities’ objective.
- Monetary policy:
  - The easing of monetary policy since late 2008 was appropriate, and the current stance of monetary policy was judged appropriate. If the outlook for growth and inflation weakens, there is scope to cut the policy rate further.
- Financial stability and banking sector:
  - Australia’s banks have coped well so far, largely because of robust supervision and regulation.
  - Banks remained profitable and raised private equity capital in early 2009, but were exposed to significant risks from sizable short-term wholesale funding.
  - The introduction of wholesale funding and retail deposit guarantees and RBA actions to provide sufficient liquidity helped maintain financial sector stability.
  - Staff commended plans for further stress tests, advised using more extreme stress scenarios than in the 2006 FSAP, and found that preliminary analysis suggests potential losses from a sizable downside shock would not reduce the capital of large banks below the regulatory minimum.
  - Staff welcomed authorities’ ongoing work on crisis preparedness to strengthen financial stability.

### Introduction: pre-crisis strengths and vulnerabilities
- Strengths at onset of global recession:
  - Sound macroeconomic policies and structural reforms contributed to 17 years of continuous growth.
  - National income boosted by a commodity price boom; terms of trade at highest level in more than half a century.
  - The Commonwealth government had eliminated its net debt; corporate and bank leverage were relatively low.
- Immediate impacts from collapse of Lehman Brothers (September 2008):
  - Key commodity prices fell sharply, domestic money markets came under stress, and offshore funding tightened.
  - The currency depreciated and equity prices plunged.
- Vulnerabilities highlighted by the crisis:
  - Household debt at over 150 percent of disposable income in 2008.
  - Short-term external borrowing at over 50 percent of GDP in 2008.
  - Unemployment increased, though less than in many other advanced countries.

### The impact of the global crisis: financial markets, real economy, inflation, and credit
- Financial market developments:
  - Short-term money market spreads and Credit Default Swap (CDS) spreads for banks and corporates widened significantly in late 2008, then recovered some ground.
  - A financial stress index spiked in late 2008, then eased back below levels in Canada, the United Kingdom, and the United States.
  - Equities and the currency fell sharply; business and consumer confidence collapsed and later showed signs of recovery.
- Real sector:
  - Real GDP growth eased to 2.3 percent in 2008 and 1½ percent in 2009 Q1 (saar), well below trend.
  - Negative wealth effects from falling equity and house prices and collapsing confidence led to a contraction in domestic demand.
  - Business investment fell by 23 percent in 2009 Q1 (saar).
  - Net exports increased as imports declined and export volume growth remained positive in 2009 Q1 due to strong commodity shipments, especially to China.
  - Manufacturing value added fell sharply, but manufacturing comprises less than one-tenth of total output, limiting the hit to overall GDP growth.
- Inflation and resource utilization:
  - Capacity utilization declined sharply; the unemployment rate rose by almost 2 percentage points from its trough in early 2008.
  - Prices decelerated markedly: headline, nontradables, and tradables inflation moderated.
  - Headline CPI inflation was 1½ percent year-on-year in the June quarter—below the RBA target band of 2–3 percent on average over the cycle.
  - Inflation expectations and private-sector wage growth showed signs of moderating.
- Credit and household balance sheets:
  - Credit growth slowed reflecting demand and supply factors: mortgage rate reductions and a temporary first-time homebuyers’ subsidy supported housing credit demand, but business and other personal credit contracted.
  - Household debt-to-income declined slightly since mid-2008; household debt-service ratio fell further because of large drops in mortgage interest rates.

### Policy discussions: monetary and fiscal policy, macro-financial linkages, external vulnerability
- Monetary policy:
  - The RBA cut its policy rate by 425 basis points since September 2008 to 3 percent.
  - Much of the fall passed through to floating mortgage interest rates; business lending rates fell but by about 150 basis points less than the cash rate.
  - Government bond yields dropped sharply in late 2008 but rose in recent months; real interest rates declined.
  - Staff and authorities agreed current stance appropriate; scope to cut policy rate further if growth and inflation weaken.
- Fiscal policy:
  - A sizable fiscal stimulus is underway and will continue to boost activity.
  - The weaker outlook shifts the underlying cash balance into a deficit of almost 5 percent of GDP in 2009/10.
  - Staff and authorities agreed there is scope for further fiscal stimulus if growth weakens, given low public debt; monetary policy should remain first line of defense.
  - The authorities aim to return to budget surpluses over the medium-term; if trend growth or terms of trade are lower than budget assumptions, further spending restraint would be needed to meet that objective.
- Domestic macro-financial linkages and preserving financial stability:
  - Banks were profitable and raised private equity capital in early 2009; however, exposure to sizable short-term wholesale funding remains a risk.
  - The wholesale funding and retail deposit guarantees and RBA liquidity provision helped maintain stability.
  - Staff recommended further stress tests using more extreme scenarios than in the 2006 FSAP.
  - Preliminary staff analysis suggests large banks would remain above regulatory capital minimums under a sizable downside shock.
  - Continued work on crisis preparedness and FSAP recommendations implementation was welcomed.
- External vulnerability:
  - Flexible exchange rate provided a buffer for export incomes as commodity prices fell and the currency depreciated.
  - External position remains sensitive to commodity prices and the global growth recovery.

### Staff appraisal and policy recommendations (summary)
- Policy sequencing and priorities:
  - Monetary policy remains effective and should be the first line of defense; there is scope to ease further if needed.
  - Fiscal policy has an important complementary role; scope exists for additional targeted fiscal stimulus given low public debt, but with a commitment to return to surpluses over the medium-term.
- Financial sector safeguards:
  - Continue and strengthen bank stress testing; use more extreme scenarios than in the 2006 FSAP.
  - Maintain and refine crisis preparedness measures, including liquidity provision frameworks and guarantees, to preserve financial stability.
- Monitoring and risks:
  - Monitor household and external leverage (household debt over 150 percent of disposable income in 2008; short-term external borrowing over 50 percent of GDP in 2008).
  - Watch the evolution of commodity prices and the recovery in trading partner demand as key determinants of the near-term outlook.

*Source: IMF staff report, Executive Summary (pages excerpted).*

### 11.      Banks were in a healthy position at the onset of the turmoil. They reported strong

### _cr09248 - 11.      Banks were in a healthy position at the onset of the turmoil. They reported strong

### Banking sector condition
- Returns on equity were "15–20 percent" before the crisis (Figure 5).
- Tier 1 capital ratios of 7–8 percent in 2007.
- The “four-pillar policy,” which does not allow the four large banks to merge, contributed to limiting risky behavior.
- Smaller banks have somewhat weaker asset quality than large banks but "still appear sound."
- Banks had limited exposure to securitized assets and investment vehicles holding structured finance products in Australia and overseas.
- Low-doc mortgages comprise "7 percent of total mortgages," and nonconforming mortgages comprise "an additional ½ percent of total mortgages."

### Asset quality, profitability, and capital
- Past due loans and impaired assets rose but were "1½ percent of assets in March 2009."
- Profitability has fallen due to increased provisioning for bad debt, but remained "healthy" relative to earlier levels.
- Large banks raised common equity from private investors and strengthened capital positions; Tier 1 capital ratios improved to "over 8 percent."
- The bulk of Tier 1 capital is common equity.

### Funding, guarantees, and liquidity
- About half of banks’ funding comes from the wholesale market.
- Wholesale funding access was disrupted after Lehman; establishment of wholesale funding guarantees in October 2008 enabled banks to raise "$A 140 billion" in longer-term funding in the subsequent seven months.
- Financial institutions’ short-term external debt (on a residual maturity basis) was about "$A 400 billion (35 percent of GDP)" in March 2009 (staff estimate).
- The Financial Claims Scheme (introduced October 2008) provided a guarantee for retail deposits up to "$A 1 million."

### Broader financial sector impacts
- Securitization activity fell sharply after initial turmoil in 2007 and effectively shut down post Lehman; very little activity in recent months.
- Dislocation of securitization markets resulted in greater concentration of lending with the four large banks.
- Fall in equity prices reduced returns at superannuation and managed funds, contributing to a fall in household financial assets by "more than 60 percent of household disposable income in 2008."
- The stock of RMBS and ABCP outstanding was about "$A 160 billion in March 2009," about "40 percent below the peak of mid 2007," and small compared with total financial sector credit of "$A 1,900 billion."

### Fiscal position and policy response
- Commonwealth government ran surpluses of "around 1–1¾ percent of GDP" in the six years to 2007/08, which, along with asset sales, eliminated net debt and reduced gross public debt to low levels by advanced country standards.
- For 2008/09, an underlying cash deficit of "2.7 percent of GDP" is estimated.
- Consolidated nonfinancial public sector deficit rose to "5¾ percent of GDP in 2008/09" when states and public corporations' investment spending is included.
- General Government Net Financial Worth and revenue/expenditure dynamics are detailed in Figure 6 (text figures).

### External sector and capital flows
- Current account deficit narrowed to "close to 4 percent of GDP in 2008."
- Commodity contract prices negotiated in early 2008 for iron ore and coal are being renegotiated with prices expected to fall by "30–60 percent," bringing them back to just over 2007 levels.
- Current account deficit narrowed further in "2009 Q1 to less than 2 percent of GDP."
- Net foreign liabilities stabilized at "about 60 percent of GDP" over the past two years.
- Staff estimate financial account and composition changes: short-term external debt and gross external debt increased; gross external debt exceeded "100 percent of GDP" (Figure 7 and text figures).

### Outlook and scenarios
- Near-term growth outlook: aggressive policy action is expected to limit the decline in activity to "½ percent in 2009."
- Staff baseline projects:
  - Private consumption projected to be stagnant in 2009.
  - Private investment expected to fall sharply.
  - Growth projected to reach "1½ percent in 2010," led by government infrastructure spending.
  - Unemployment rate projected to rise to "7½ percent in 2011."
- By 2014, GDP projected to be "about 5 percent lower than implied by the precrisis trend."
- Terms of trade are projected by staff to remain "more than 40 percent above the average for the 1990s."
- Risks:
  - Downside: prolonged weak world economy, sharper deterioration in banks’ asset quality (e.g., from lower house prices), or loss of investor confidence in banks or the sovereign (noted as highly unlikely given low public debt).
  - Upside: stronger-than-expected demand from China; greater responsiveness to existing policy stimulus.
- Authorities' view (May 2009 Budget): faster recovery with growth reaching "4½ percent by 2011/12" and a smaller permanent output loss than staff projections.

### Monetary policy stance and recommendations
- Staff and authorities agreed the current stance of monetary policy is appropriate; earlier cuts in the policy rate will continue to support domestic demand.
- The RBA has kept rates on hold given substantial fiscal and monetary stimulus and signs of recovery in consumer and business confidence.
- The policy rate is currently below that implied by a simple Taylor Rule; staff’s forecast for inflation in 2010 is "just under 2 percent."
- If growth and inflation outlook worsens, there is "ample scope for further cuts in the policy rate."
- In a downside scenario (lower global demand and higher risk premia), a cut in the policy rate and a depreciation of the currency would ease financial conditions.
- Authorities were advised to be more cautious than normal in tightening given global fragility; return of the cash rate to neutral should wait for clear signs of a sustainable recovery.
- The monetary transmission mechanism has not been impaired; unconventional monetary policy measures are considered unlikely to be needed, though staff suggested planning for implementation if required.
- Some measures already taken to resuscitate RMBS and ABCP markets, including government planning to buy "about $A 8 billion in RMBS securities."
- Inflation-targeting framework remains the nominal anchor with a target of "2–3 percent inflation, on average, over the cycle."

*Source: IMF Staff Report (content unit _cr09248).*

### Box 1. Australia: Slower World Recovery

### Box 1. Australia: Slower World Recovery

### Scenario design and key assumptions
- Simulation model: Global Integrated Monetary and Fiscal Model (GIMF).
- External shock: shocks to investment and consumption proxy an intensification of the global financial crisis.
- External growth impact: reduces growth in the world outside Australia by roughly 2 percentage points in each of the first three years.
- Home bias: weaker world growth assumed to increase home bias in investment and consumption goods outside Australia.
- Domestic shocks: smaller shocks to investment and consumption applied to Australia.
- Risk premium shock: temporary increase in Australia’s currency risk premium of almost 200 basis points, with half of that flowing through to Australian market interest rates.
- Fiscal policy assumption: nominal government spending remains at baseline, but revenues decline with nominal GDP.

### Real economy and commodity price effects
- Real GDP:
  - The shock reduces the level of real GDP in Australia by 3 percent after three years.
- Commodity prices and exchange rate:
  - Slower world growth reduces commodity prices by roughly 20 percent, lowering private incomes and weakening domestic demand in Australia.
  - The Australian-dollar price of commodities is buffered by depreciation in the real exchange rate (real effective exchange rate; + is depreciation).

### Interest rates and inflation
- Policy response:
  - With weaker growth reducing inflation, the policy rate declines by almost 300 basis points.
  - A portion of the policy rate cut is not passed through to lending rates owing to a rise in the risk premium.
- Interest rates:
  - Nominal policy interest rate falls by almost 300 basis points.
  - Nominal market interest rate reflects only half of the currency risk premium increase passing through to market rates (from the almost 200 basis points currency risk premium shock).

### Fiscal outcomes
- Fiscal balance:
  - The fiscal balance moves into deficit for five years.
- Government debt:
  - Government debt rises by almost 7 percent of GDP at its peak.
- Contextual note:
  - These fiscal outcomes assume nominal government spending fixed at baseline and revenues falling with nominal GDP.

### Policy implications and staff advice (from related fiscal analysis)
- Monetary policy:
  - Staff advised that monetary policy should be the first line of defense, as it remains effective and because additional fiscal stimulus would increase government debt further.
- Fiscal policy:
  - Given low public debt, there is scope for further fiscal stimulus if the outlook for growth weakens, but automatic fiscal stabilizers should be allowed to work fully in the near term.
  - Staff analysis suggests impact on growth is highest for public investment spending.
  - Transfers targeted to low-income households have a faster yet still large impact and could be most suitable if a prompt demand impetus is required.
- Fiscal stimulus implemented (discretionary measures since September 2008):
  - 0.8 percent of GDP in 2008.
  - 2.9 percent of GDP in 2009.
  - 2 percent of GDP in 2010.
- Staff estimate on stimulus effect:
  - Stimulus will raise real GDP by about 3 percent relative to baseline in 2009 and 2010, before dissipating in outer years.
  - Using GIMF, alternative calibrations give a range for the cumulative impact on GDP of 5¼–12¾ percent over the five years 2008–12.

### Financial stability and macro-financial linkages
- Household and housing vulnerabilities:
  - Australian household debt is relatively high by advanced country standards.
  - Staff analysis suggests house prices are overvalued by 0–20 percent.
  - Less than 10 percent of owner-occupiers with mortgages belong to the high risk group (those with a debt-service ratio over 30 percent and a loan-to-value ratio greater than 80 percent).
- Banking sector resilience:
  - Staff’s preliminary analysis suggests that potential further losses from a sizeable downside shock that would increase mortgage and corporate defaults sharply would not reduce large banks’ capital below the regulatory minimum.
- Stress testing and supervision:
  - Staff commended APRA for regularly stress testing the banking sector and advised banks be required to undertake more extreme stress tests than in the past, including joint tests with subsidiaries to assess capital and liquidity positions against a sharp jump in unemployment, a drop in house and commodity prices, and a disruption to wholesale funding.
  - Stress tests should take account of possible spillovers from New Zealand and United Kingdom subsidiaries of Australian banks that are equivalent to about ⅓ of Australian GDP (mostly in New Zealand).
- Liquidity guidance:
  - Planned introduction of new liquidity guidelines is welcome; banks have started to increase medium-term funding, but liquidity positions should continue to be based on prudentially enforced liquidity guidelines.
- Crisis preparedness:
  - Staff underlined importance of further crisis preparedness planning, especially for liquidity or solvency problems in major banks in Australia and New Zealand.
- Exit strategies:
  - Risk-pricing element of the wholesale funding guarantee provides a natural exit strategy once markets normalize.
  - Authorities plan to review options for guarantees to retail deposits, including changes to the new Financial Claims Scheme that covers deposits of less than a million dollars.

### Basel II implementation (summary of IMF mission assessment)
- Implementation:
  - APRA implemented the Basel II framework in 2008.
  - Major banks representing nearly 70 percent of banking industry assets adopted the advanced approaches for credit, market and operational risk.
- Conservatism in Australian choices:
  - A 20 percent loss given default (LGD) floor was adopted for residential mortgages (higher than the Basel II 10 percent floor).
  - Higher risk weights required for certain residential mortgages under the standardized approach.
  - Reduced risk weights permissible under the standardized approach have not been introduced for retail lending.
  - Banks’ capital requirements under advanced approaches remain subject to the 90 percent floor of the Basel I capital requirement (instead of the 80 percent floor applicable in the second year).
  - APRA requires banks using advanced approaches to hold capital against interest rate risk in the banking book.
- Recommendations:
  - APRA should continue to undertake increasingly complex supervisory work, such as drill down reviews of banks’ economic capital models and stress testing practices.
  - The mission recommended increased Pillar 3 disclosures by second-tier banks and a re-assessment of the operational risk approach applicable to their operations.

*Source: Global Integrated Monetary and Fiscal Model simulation; Fund staff analysis as presented in the Box and accompanying text.*

### 44.      A range of indicators suggest that the currency is broadly

### _cr09248 - 44.      A range of indicators suggest that the currency is broadly

### Exchange rate assessment
- A range of indicators suggest that the currency is broadly in line with fundamentals (Box 3).
- The fall of the exchange rate from mid 2008 to early 2009 was driven by a decline in commodity prices and the loosening of monetary policy (Figure 11).
- The currency is free floating and fluctuates considerably because of the importance of commodity exports.
- The authorities agreed that the currency is broadly in line with fundamentals.
- Box 3: Equilibrium Real Effective Exchange Rate
  - Macroeconomic balance (MB) approach: equilibrium current account deficit about 4½ percent of GDP; staff’s projected current account deficit broadly in line with the norm; implies a small undervaluation of about 4 percent.
  - Equilibrium real exchange rate (ERER) approach: suggests a small overvaluation; model implies overvaluation of about 5 percent in 2014 relative to June 2009 REER, assuming a weakening of the terms of trade in 2009.
  - External sustainability (ES) approach: implies an overvaluation of less than 10 percent assuming net foreign liabilities (NFL) stabilize at about 46 percent of GDP; a smaller overvaluation of less than 5 percent if NFL stabilizes at end-2008 level of 60 percent of GDP.
  - Estimates are subject to considerable uncertainty; wide confidence intervals noted.

### Current account, trade and projection
- Staff forecasts the current account deficit to be around 3½ percent of GDP in 2009.
- Trade deficit expected to narrow slightly in 2009 as decline in terms of trade is offset by lower imports and continued strong commodity export volumes.
- Income balance projected to narrow by about ½ percent of GDP in 2009 because of lower interest and dividend payments.
- Current account deficit is forecast to be around the lower end of the norm of 4–5 percent of GDP over the medium-term, assuming that the terms of trade remains well above the average of the past 10 years (Table 3).
- Staff projects an increase in net foreign liabilities to 70 percent of GDP by 2014, assuming current account deficits of about 4 percent of GDP are sustainable.
- Financing the deficits should be feasible given relatively attractive returns to investment in Australia, owing to high commodity prices and expected strong demand from China and other Asian economies.
- Australia’s current account deficits largely reflect high investment rather than low saving and should be sustainable if investment leads to growth in export capacity, especially in the resource sector.
- More limited access to foreign capital markets than assumed would lower investment, with negative implications for potential growth.

### External debt structure and vulnerabilities
- Australia’s sizable short-term external debt is a key macro-financial risk in the current global environment.
- Short-term debt (on a residual maturity basis) comprises almost half of external debt and is relatively high by advanced country standards (Figure 12).
- Most of the short-term debt matures in 90 days or less, and almost 70 percent of total external debt is held by financial institutions.
- The authorities noted limited problems with rolling over short-term external debt; bulk of Australia’s short-term debt was rolled over between June 2008 and March 2009 despite intense turmoil in international capital markets.
- Depreciation of the currency aided reduction of external debt in U.S. dollar terms while increasing external debt in domestic currency terms.
- March-09 and related debt figures (expressed in source tables):
  - Gross external debt (A$ billions): June-08 1,100; Dec-08 1,260; Mar-09 1,227.
  - Of which: Short term (A$ billions): June-08 524; Dec-08 610; Mar-09 595.
  - Gross external debt (US$ billions): June-08 1,059; Dec-08 873; Mar-09 844.
  - Of which: Short-term (US$ billions): June-08 504; Dec-08 423; Mar-09 409.
  - Memorandum: US$/A$ (end of period): June-08 0.96; Dec-08 0.69; Mar-09 0.69.
- Almost 40 percent of gross foreign debt is in Australian dollars, with half of the remainder in U.S. dollars.
- Survey data suggests the bulk of the foreign-currency-denominated debt is hedged against currency risk.
- Gross external liabilities are lower than in many advanced countries, but short-term debt to GDP is relatively large.
- Short-term debt: almost half of external debt; the bulk matures within 90 days.

### Financial sector resilience and risks
- The proposed liquidity guidelines for banks should encourage less reliance on short-term wholesale funding.
- If banks face problems rolling over external debt, they have access to the RBA’s new liquidity facilities, including discounting mortgages. In such circumstances, resultant increase in Australian dollar liquidity would lead to a depreciation of the exchange rate.
- Banks’ healthy starting position and prompt policy response helped preserve financial stability, but vulnerabilities remain:
  - Liabilities side: exposure to significant risks from short-term wholesale funding.
  - Asset side: non-performing loans could rise further as unemployment increases and growth remains weak; banks have increased provisioning and raised equity from private capital markets in early 2009.
- APRA regularly undertakes stress tests; future tests should be based on more extreme scenarios than used in the past.
- Prudential judgment should assess adequacy of capital buffers; capital requirements should be raised if necessary.
- Ongoing work on crisis preparedness important for potential liquidity or solvency problems in major banks in Australia and New Zealand.

### Policy appraisal and recommendations
- Authorities’ timely and significant macro policy response cushioned the domestic impact of the global financial crisis.
- Growth has fallen well below trend; near-term outlook remains weak and highly uncertain; growth projected to pick up in 2010, led by government infrastructure spending.
- RBA’s earlier reductions in the policy rate were appropriate; current stance of monetary policy appropriate.
  - If outlook for growth and inflation weakens, RBA has scope for further cuts in the policy rate.
  - Unconventional monetary policy easing measures are unlikely to be needed, but authorities should consider how such measures could be implemented if required.
  - RBA should exercise more caution than normal in tightening, given fragile global economy.
  - Inflation targeting framework is relatively flexible and successful in anchoring medium-term inflation expectations.
- Flexible exchange rate has been a helpful buffer; depreciation sustained exporter incomes as U.S. dollar price of commodity exports fell sharply in late 2008.
- Fiscal policy:
  - Quick implementation of targeted and temporary fiscal stimulus is providing a sizable boost to domestic demand in 2009 and 2010.
  - Shift of the budget into deficit is appropriate given low public debt by advanced country standards.
  - There is scope for further fiscal stimulus if outlook for growth weakens, although monetary policy should be first line of defense.
  - Government’s commitment to return to surpluses and achieve a positive budget balance, on average, over the medium term is commendable; further fiscal adjustment may be needed if trend growth and terms of trade are lower than assumed.

### Key statistics and projections (as presented)
- Current account deficit forecast: around 3½ percent of GDP in 2009.
- Income balance narrowing: about ½ percent of GDP in 2009.
- Medium-term current account norm: 4–5 percent of GDP.
- Equilibrium current account deficit (MB approach): about 4½ percent of GDP.
- Implied small undervaluation (MB): about 4 percent.
- ERER implied overvaluation in 2014: about 5 percent (relative to June 2009 REER, assuming weakening terms of trade in 2009).
- ES implied overvaluation: less than 10 percent (NFL stabilizing at 46 percent of GDP); less than 5 percent if NFL stabilizes at 60 percent of GDP.
- Projected net foreign liabilities: 70 percent of GDP by 2014 (assuming current account deficits of about 4 percent of GDP).
- Gross external debt (A$ billions): June-08 1,100; Dec-08 1,260; Mar-09 1,227.
- Short-term external debt (A$ billions): June-08 524; Dec-08 610; Mar-09 595.
- Gross external debt (US$ billions): June-08 1,059; Dec-08 873; Mar-09 844.
- Short-term external debt (US$ billions): June-08 504; Dec-08 423; Mar-09 409.
- US$/A$ (end of period): June-08 0.96; Dec-08 0.69; Mar-09 0.69.
- Almost 70 percent of total external debt is held by financial institutions.
- Almost 40 percent of gross foreign debt is in Australian dollars; half of the remainder in U.S. dollars.

*IMF staff report content as provided.*

### 57.      It is proposed that the next Article IV consultation cycle with Australia take place on

### _cr09248 - 57.      It is proposed that the next Article IV consultation cycle with Australia take place on

### Overview
- Nominal GDP (2008): $A 1,183 billion (US$1,012 billion)
- Quota (in millions): SDR 3,237
- GDP per capita (2008): US$47,204
- Population (December 2008): 21.6 million
- Unemployment rate (June 2009): 5.9 percent
- Sources: Data provided by the Australian authorities; and Fund staff estimates and projections.

### Selected economic indicators (2006–10)
- Real GDP (percent change): 2006: 2.8; 2007: 4.0; 2008: 2.3; 2009: -0.5; 2010: 1.5
- Total domestic demand (percent change): 2006: 3.1; 2007: 5.9; 2008: 3.8; 2009: -3.3; 2010: 0.4
  - Private consumption: 2006: 3.2; 2007: 4.3; 2008: 2.2; 2009: 0.5; 2010: -0.5
  - Total investment: 2006: 5.1; 2007: 9.5; 2008: 9.1; 2009: -10.5; 2010: -1.7
- Net exports (contribution to growth) 1/: 2006: -0.8; 2007: -1.7; 2008: -1.5; 2009: 3.2; 2010: 0.8
- CPI inflation (percent): 2006: 3.5; 2007: 2.3; 2008: 4.4; 2009: 1.6; 2010: 1.5
- Unemployment rate (percent): 2006: 4.8; 2007: 4.4; 2008: 4.2; 2009: 6.3; 2010: 7.4
- Gross national saving (percent of GDP): 2006: 21.6; 2007: 22.3; 2008: 24.3; 2009: 22.2; 2010: 22.2
  - General government saving: 2006: 4.7; 2007: 4.8; 2008: 4.3; 2009: 2.8; 2010: 1.0
  - Private saving 2/: 2006: 16.9; 2007: 17.6; 2008: 20.0; 2009: 19.4; 2010: 21.2
- Gross capital formation (percent of GDP): 2006: 26.6; 2007: 28.2; 2008: 28.6; 2009: 25.7; 2010: 25.7

### Fiscal indicators (cash basis and accrual; selected years)
- Receipts (percent of GDP): 2006: 26.5; 2007: 26.1; 2008: 26.1; 2009: 24.2; 2010: 23.9
- Payments (percent of GDP): 2006: 24.8; 2007: 24.8; 2008: 24.0; 2009: 26.6; 2010: 28.8
- Underlying cash balance (percent of GDP): 2006: 1.6; 2007: 1.6; 2008: 1.7; 2009: -2.7; 2010: -5.1
- Fiscal balance (accrual basis, percent of GDP): 2006: 1.6; 2007: 1.9; 2008: 1.9; 2009: -2.8; 2010: -4.7
- Net debt (percent of GDP): 2006: -0.4; 2007: -2.8; 2008: -4.0; 2009: -0.4; 2010: 4.8

### Money, credit, and interest rates (end of period / latest available)
- Interest rate (90-day bill, in percent) 4/: 2006: 6.4; 2007: 7.2; 2008: 4.2; 2009: 3.2
- Treasury bond yield (10-year, in percent) 4/: 2006: 5.9; 2007: 6.3; 2008: 4.0; 2009: 5.4
- M3 (percent change): 2006: 12.9; 2007: 22.5; 2008: 15.0; 2009: 15.0
- Private domestic credit (percent change): 2006: 14.3; 2007: 17.2; 2008: 7.7; 2009: 5.2

### External sector and balance of payments (percent of GDP)
- Current account balance: 2006: -5.3; 2007: -6.2; 2008: -4.3; 2009: -3.4; 2010: -3.4
  - Trade balance: 2006: -1.3; 2007: -2.0; 2008: -0.4; 2009: -0.3; 2010: -0.1
- Terms of trade (percent change): 2006: 7.5; 2007: 4.6; 2008: 13.3; 2009: -12.1; 2010: -1.5
- Net external liabilities (percent of GDP): 2006: 59.4; 2007: 60.3; 2008: 60.3; 2009: 65.8; 2010: 67.8
- Net external debt (percent of GDP): 2006: 53.3; 2007: 55.7; 2008: 58.8; 2009: 60.4; 2010: 62.2
- Gross official reserves 4/ (percent of GDP): 2006: 6.9; 2007: 2.8; 2008: 4.0; 2009: 4.1
- Exchange rate (period average) U.S. dollar/Australian dollar 4/: 2006: 0.75; 2007: 0.84; 2008: 0.85; 2009: 0.80
- Trade-weighted index 4/: 2006: 63.0; 2007: 67.5; 2008: 66.4; 2009: 61.7
- Real effective exchange rate 5/ (2000 = 100): 2006: 124.7; 2007: 133.3; 2008: 132.1; 2009: 120.2

### Table 2 highlights: Fiscal accounts (2004/05–2012/13) — Commonwealth government (accrual basis)
- Revenue (percent of GDP): 2004/05: 27.0; 2005/06: 27.0; 2006/07: 26.9; 2007/08: 26.8; 2008/09: 24.7; 2009/10: 24.7; 2010/11: 24.1; 2011/12: 24.7; 2012/13: 25.2
  - Tax (percent of GDP): 2004/05: 25.6; 2005/06: 25.4; 2006/07: 25.1; 2007/08: 25.3
    - Income tax: 2004/05: 18.2; 2005/06: 18.2; 2006/07: 18.1; 2007/08: 18.4
      - Individuals and other withholdings: 2004/05: 12.1; 2005/06: 11.8; 2006/07: 11.2; 2007/08: 11.1
    - Indirect and other tax: 2004/05: 7.5; 2005/06: 7.2; 2006/07: 7.0; 2007/08: 6.9
  - Nontax: 2004/05: 1.4; 2005/06: 1.6; 2006/07: 1.8; 2007/08: 1.5
- Expenditure (percent of GDP): 2004/05: 25.7; 2005/06: 25.2; 2006/07: 24.8; 2007/08: 24.7; 2008/09: 27.1; 2009/10: 28.9; 2010/11: 28.0; 2011/12: 27.6; 2012/13: 27.3
  - Salaries and wages (percent of GDP): 2004/05: 1.3; 2005/06: 1.3; 2006/07: 1.3; 2007/08: 1.3; 2008/09: 1.3; 2009/10: 1.5; 2010/11: 1.4; 2011/12: 1.3; 2012/13: 1.2
  - Goods and services (percent of GDP): 2004/05: 5.0; 2005/06: 5.0; 2006/07: 4.9; 2007/08: 4.6; 2008/09: 4.8; 2009/10: 5.4; 2010/11: 5.1; 2011/12: 5.1; 2012/13: 4.9
  - Current transfers (percent of GDP): 2004/05: 17.0; 2005/06: 16.7; 2006/07: 16.2; 2007/08: 16.2; 2008/09: 17.9; 2009/10: 18.0; 2010/11: 17.9; 2011/12: 18.0; 2012/13: 18.0
- Net capital investment (percent of GDP): 2004/05: 0.1; 2005/06: 0.3; 2006/07: 0.2; 2007/08: 0.2; 2008/09: 0.4; 2009/10: 0.5; 2010/11: 0.5; 2011/12: 0.5; 2012/13: 0.4
- Fiscal balance (accrual basis, percent of GDP): 2004/05: 1.2; 2005/06: 1.6; 2006/07: 1.9; 2007/08: 1.9; 2008/09: -2.8; 2009/10: -4.7; 2010/11: -4.4; 2011/12: -3.4; 2012/13: -2.5

### Medium-term scenario (2008–14) — selected projections and averages
- Real GDP (percent change): Average 1998–2007: 3.6; 2008: 2.3; 2009: -0.5; 2010: 1.5; 2011: 2.8; 2012: 3.7; 2013: 3.7; 2014: 3.4
- Output gap: 2008: 1.3; 2009: -1.4; 2010: -2.2; 2011: -1.9; 2012: -0.8; 2013: -0.3; 2014: 0.0
- CPI inflation (percent): Average 1998–2007: 2.8; 2008: 4.4; 2009: 1.6; 2010: 1.5; 2011: 2.2; 2012: 2.6; 2013: 2.5; 2014: 2.5
- Unemployment rate (percent): Average 1998–2007: 6.0; 2008: 4.2; 2009: 6.3; 2010: 7.4; 2011: 7.5; 2012: 6.2; 2013: 5.7; 2014: 5.0
- Gross national saving (percent of GDP): Average 1998–2007: 20.6; 2008: 24.3; 2009: 22.2; projected 2010: 22.2; 2011: 22.5; 2012: 22.5; 2013: 22.8; 2014: 23.2
- Commonwealth budget (percent of GDP) — Underlying cash balance 4/: Average 1998–2007: 1.0; 2008: 1.7; 2009: -2.7; 2010: -5.1; 2011: -4.5; 2012: -3.6; 2013: -2.3; 2014: -1.7

### Balance of payments in U.S. dollars and external indicators (2004–08)
- Current account balance (percent of GDP): 2004: -6.1; 2005: -5.8; 2006: -5.3; 2007: -6.2; 2008: -4.3
- Capital and financial account balance (percent of GDP): 2004: 6.2; 2005: 5.9; 2006: 5.4; 2007: 6.3; 2008: 4.3
- Total reserves (in billions of U.S. dollar): 2004: 36.9; 2005: 43.3; 2006: 55.1; 2007: 26.9; 2008: 32.9
- Net international investment position (percent of GDP): 2004: -56.0; 2005: -57.0; 2006: -59.4; 2007: -60.3; 2008: -60.3
- Net interest payments to exports (in percent): 2004: 9.5; 2005: 9.1; 2006: 10.2; 2007: 12.1; 2008: 10.3

### Financial sector indicators (2004–08)
- General government gross debt (percent of GDP): 2004: 12.0; 2005: 11.0; 2006: 10.1; 2007: 9.8; 2008: 11.7
- Interest rates (percent): 3-month T-bill: 2004: 5.5; 2005: 5.6; 2006: 6.0; 2007: 6.7; 2008: 7.0
- 10-year government bond (percent): 2004: 5.6; 2005: 5.3; 2006: 5.6; 2007: 6.0; 2008: 5.8
- Regulatory capital to risk-weighted assets: 2004: 10.5; 2005: 10.4; 2006: 10.4; 2007: 10.2; 2008: 11.4
- Tier I capital to risk-weighted assets 1/: 2004: 7.6; 2005: 7.6; 2006: 7.4; 2007: 7.2; 2008: 8.2
- Impaired assets to total assets: 2004: 0.3; 2005: 0.2; 2006: 0.2; 2007: 0.2; 2008: 0.8
- Specific provisions to impaired assets: 2004: 41.4; 2005: 37.1; 2006: 39.1; 2007: 39.1; 2008: 36.3
- Loans composition (share of total): Public sector: 2004: 2.2; 2005: 1.5; 2006: 1.4; 2007: 1.3; 2008: 1.8
  - Individuals: 2004: 62.1; 2005: 62.3; 2006: 60.4; 2007: 54.6; 2008: 54.0
  - Housing loans: 2004: 53.6; 2005: 53.8; 2006: 51.9; 2007: 46.7; 2008: 47.5
  - Commercial lending: 2004: 35.7; 2005: 36.3; 2006: 38.2; 2007: 44.1; 2008: 44.2

### Appendix I — Australia: Policy responses to the global financial crisis
- Monetary Policy:
  - Cash rate target cut by cumulative 425 basis points to 3 percent since September 2008.
- Liquidity Support:
  - RBA extended collateral list in repo operations to include residential mortgage-backed securities, commercial paper, and asset-backed commercial paper.
  - RBA extended maturity of repos to one year.
  - RBA established a US$30 billion swap line with the US Federal Reserve Bank in September 2008, initially through January 2009 and later extended to October 2009.
  - Government announced purchase of up to $A 8 billion of residential mortgage-backed securities.
- Funding Guarantees:
  - Financial Claims Scheme: total deposit balances up to and including $A 1 million per customer in eligible authorized deposit taking institution are guaranteed. Scheme effective October 2008 and will remain in place until October 2011.
  - Deposits over $A 1 million can be guaranteed for the same fees as wholesale funding.
  - Eligible authorized deposit taking institutions can secure guarantees for existing or new wholesale funding for a fee ranging from 70 to 150 basis points depending on credit rating.
- Financial Regulation/Supervision:
  - Authorities enhanced supervision of credit rating agencies and research houses.
  - In September 2008, ASIC banned covered short selling of financial and nonfinancial stock.
  - In December 2008, legislation passed to ban all naked short selling in Australia (subject to exemptions by ASIC).
  - Ban on covered short selling of nonfinancial stocks lifted in November 2008; ban on covered short selling of financial stocks lifted in May 2009.
  - RBA working with industry to improve disclosure of securities lending activity.

### Appendix II — FSAP: Key recommendations of the 2006 FSAP and implementation progress (summary)
- Banking:
  - Recommendation: Continue to ensure strong risk management practices, including regular stress testing.
  - Progress: Basel II framework effective January 2008; five banks approved to adopt internal ratings based approach for credit risk and AMA for operational risk.
- Failure resolution and crisis management:
  - Recommendation: Develop a formal process to manage failure of institutions and wider crises.
  - Progress: October introduction of Financial Claims Scheme (FCS) providing depositors timely access to first $A 1 million and broader crisis management arrangements.
- Supervisory capacity:
  - Recommendation: Ensure supervisory agencies have adequate resources and flexibility.
  - Progress: APRA received additional funding in 2007/08 Budget; Government provided $A 45.5 million to APRA over four years in October 2008; ministerial consent requirement removed for certain administrative actions; ASIC received substantial funding increases.
- Cooperation with New Zealand regulators:
  - Recommendation: Build on Trans-Tasman Council progress to improve coordination in crisis management.
  - Progress: Legislative changes formalizing regulators’ duty to be alert to each other’s interests in times of stress came into force in December 2006; focus shifted to practical coordination.
- Insurance:
  - Recommendation: Advance Stage II reforms (capital management, reinsurance documentation, corporate governance standards, disclosure).
  - Progress: APRA harmonizing prudential requirements across insurance and banking; from July 1, 2008 Direct Offshore Foreign Insurers must be authorized by APRA; Discretionary Mutual Funds subject to compulsory information collection.
- AML/CFT:
  - Recommendation: Prioritize legislative and operational arrangements in AML/CFT.
  - Progress: AML/CFT Act adopted December 2006; first tranche implemented; second tranche under government consideration; legislation implemented to facilitate information exchange between AUSTRAC and APRA.

*Source: IMF Staff (from the supplied country report content).*

### Appendix III. Australia: External Debt Sustainability: Bound Tests

### Appendix III. Australia: External Debt Sustainability: Bound Tests

### Overview of bound tests and scenarios
- Shaded areas in figures represent actual data.
- Individual shocks are permanent one-half standard deviation shocks.
- Figures in boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.
- Combined shock: Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
- Real depreciation shock: One-time real depreciation of 30 percent occurs in 2009. This scenario assumes foreign exchange hedging covers 79 percent of foreign currency debt.

### Key graphical values from bound tests (gross external debt in percent of GDP)
- Historical: 83
- Baseline: 115
- CA shock (non-interest current account shock): 124 (box figure) and Baseline: 115 (box figure)
- Combined shock: 125 (box figure) and Baseline: 115 (box figure)
- Real depreciation shock (30% depreciation): 125 (box figure) and Baseline: 115 (box figure)

### Major findings and baseline projections (macro outlook)
- Real GDP growth:
  - 2006: 2.8
  - 2007: 4.0
  - 2008: 2.3
  - 2009 (Proj): -0.5
  - 2010 (Proj): 1.5
- Total domestic demand (percent change):
  - 2006: 3.1
  - 2007: 5.9
  - 2008: 3.8
  - 2009 (Proj): -3.3
  - 2010 (Proj): 0.4
- Private consumption (percent change):
  - 2006: 3.2
  - 2007: 4.3
  - 2008: 2.2
  - 2009 (Proj): 0.5
  - 2010 (Proj): -0.5
- Total investment (percent change):
  - 2006: 5.1
  - 2007: 9.5
  - 2008: 9.1
  - 2009 (Proj): -10.5
  - 2010 (Proj): -1.7
- Net exports contribution to growth:
  - 2006: -0.8
  - 2007: -1.7
  - 2008: -1.5
  - 2009 (Proj): 3.2
  - 2010 (Proj): 0.8

### Inflation, unemployment, saving, and external positions
- CPI inflation:
  - 2006: 3.5
  - 2007: 2.3
  - 2008: 4.4
  - 2009 (Proj): 1.6
  - 2010 (Proj): 1.5
- Unemployment rate:
  - 2006: 4.8
  - 2007: 4.4
  - 2008: 4.2
  - 2009 (Proj): 6.3
  - 2010 (Proj): 7.4
- Gross national saving (percent of GDP):
  - 2006: 21.6
  - 2007: 22.3
  - 2008: 24.3
  - 2009 (Proj): 22.2
  - 2010 (Proj): 22.2
- Gross capital formation (percent of GDP):
  - 2006: 26.6
  - 2007: 28.2
  - 2008: 28.6
  - 2009 (Proj): 25.7
  - 2010 (Proj): 25.7
- Current account (percent of GDP):
  - 2006: -5.3
  - 2007: -6.2
  - 2008: -4.3
  - 2009 (Proj): -3.4
  - 2010 (Proj): -3.4
- Trade balance (percent of GDP):
  - 2006: -1.3
  - 2007: -2.0
  - 2008: -0.4
  - 2009 (Proj): -0.3
  - 2010 (Proj): -0.1
- Net external liabilities (percent of GDP):
  - 2006: 59.4
  - 2007: 60.3
  - 2008: 60.3
  - 2009 (Proj): 65.8
  - 2010 (Proj): 67.8
- Net external debt (percent of GDP):
  - 2006: 53.3
  - 2007: 55.7
  - 2008: 58.8
  - 2009 (Proj): 60.4
  - 2010 (Proj): 62.2

### Fiscal and monetary indicators
- Fiscal (cash basis, percent of GDP):
  - Receipts: 2006: 26.5; 2007: 26.1; 2008: 26.1; 2009 (Proj): 24.2; 2010 (Proj): 23.9
  - Payments: 2006: 24.8; 2007: 24.2; 2008: 24.0; 2009 (Proj): 26.6; 2010 (Proj): 28.8
  - Underlying cash balance: 2006: 1.6; 2007: 1.6; 2008: 1.7; 2009 (Proj): -2.7; 2010 (Proj): -5.1
  - Fiscal balance (accrual basis): 2006: 1.6; 2007: 1.9; 2008: 1.9; 2009 (Proj): -2.8; 2010 (Proj): -4.7
  - Net debt: 2006: -0.4; 2007: -2.8; 2008: -4.0; 2009 (Proj): -0.4; 2010 (Proj): 4.8
- Interest rates and credit:
  - Interest rate (90-day bill, in percent): 2006: 6.4; 2007: 7.2; 2008: 4.2; 2009 (latest month): 3.2
  - Treasury bond yield (10-year, in percent): 2006: 5.9; 2007: 6.3; 2008: 4.0; 2009 (latest month): 5.4
  - M3 (percent change): 2006: 12.9; 2007: 22.5; 2008: 15.0; 2009 (latest month): 15.0
  - Private domestic credit (percent change): 2006: 14.3; 2007: 17.2; 2008: 7.7; 2009 (latest month): 5.2
- Terms of trade (percent change):
  - 2006: 7.5
  - 2007: 4.6
  - 2008: 13.3
  - 2009 (Proj): -12.1
  - 2010 (Proj): -1.5

### Vulnerabilities highlighted
- Household debt: over 150 percent of disposable income in 2008.
- Short-term external borrowing: over 50 percent of GDP in 2008.
- The turmoil following the collapse of Lehman Brothers in September 2008 led to:
  - Sharp falls in key commodity prices.
  - Stress in domestic money markets and tighter offshore funding.
  - Currency depreciation and plunging equity prices.
- Policy responses and mitigating factors:
  - Reserve Bank of Australia’s policy rate reduced by 425 basis points since September 2008, with much pass-through to lending rates.
  - Flexible exchange rate provided buffer for export incomes.
  - Sizable fiscal stimulus supporting domestic demand.
  - Banking sector entered the recession with returns on equity of 15–20 percent, relatively low leverage, and high capital adequacy ratios.
  - Widespread hedging of foreign currency debt: 79 percent hedged (as assumed in real depreciation scenario).

### Executive Board assessment and policy recommendations
- Commended the authorities for timely policy response—sizable fiscal and monetary stimulus, flexible exchange rate, and resilient banking sector to underpin recovery.
- Near-term outlook: weak with high uncertainty in global financial markets.
- Vulnerabilities: persistent current account deficit, sizable short-term external debt, worsening household balance sheets.
- Monetary policy:
  - Welcomed early reductions in the policy rate and supported current stance.
  - Saw room for further policy rate cuts if growth and inflation outlook weakens.
  - Unconventional monetary measures should remain in the toolkit even though unlikely needed.
  - Flexible inflation-targeting framework successful in anchoring medium-term inflation expectations.
- Fiscal policy:
  - Welcomed targeted, temporary fiscal stimulus for 2009–2010.
  - Given low public debt, scope remains for further fiscal stimulus if warranted, but prudence is needed due to contingent liabilities from financial sector support.
  - Authorities committed to a deficit exit strategy to return the budget to surpluses over the medium term; further fiscal adjustment may be needed if trend growth and terms of trade are lower than assumed.
- Financial sector surveillance and regulation:
  - Noted banks’ exposure to short-term wholesale funding; welcomed planned liquidity guidelines to reduce reliance on such funding.
  - Encouraged vigilance on house price adjustments and close monitoring of banks’ property exposures.
  - Commended Australian Prudential Regulation Authority for regular stress testing; recommended future stress tests use more extreme scenarios and raising capital requirements if necessary.
  - Welcomed ongoing crisis preparedness work for potential liquidity or solvency problems.

### Data and statistical notes
- Data provision is adequate for surveillance; Australia subscribed to the Special Data Dissemination Standard (SDDS).
- Table of Common Indicators (as of July 2, 2009) lists latest observation dates and frequencies for key series including exchange rates (07/2/09), international reserve assets (05/09), reserve/base money (05/09), broad money (05/09), central bank balance sheet (05/27/09), consolidated banking system balance sheet (05/09), interest rates (07/2/09), CPI (Q1 2009 observed 04/22/09), government finances (2007/08 received 6/09), external current account balance (Q1 2009 received 06/02/09), GDP/GNP (Q1 2009 received 06/03/09), gross external debt (Q1 2009 received 06/10/09), and international investment position (Q1 2009 received 06/02/09).

*Source: Appendix III. Australia: External Debt Sustainability: Bound Tests; Staff Report for the 2009 Article IV Consultation—Informational Annex (IMF), July 22, 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09248.pdf_