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IMF Says NZ Faces Risks Over Addiction To Offshore Funding

Fuseworks Media
Fuseworks Media

Wellington, May 20 NZPA - The International Monetary Fund (IMF) has raised concerns about disruptions to New Zealand's access to offshore funding, but says its sound banking system and focus on inflation would help cushion the economy.

A steady stream of offshore funds, largely bank borrowing to help fund mortgage lending, has pushed New Zealand's net foreign liabilities to almost 90 percent of gross domestic product (GDP), among the highest of advanced economies.

From 2004 to 2007, net capital inflows averaged more than 7 percent of GDP, dominated by bank debt and also dominated by debt maturing in under one year.

A disruption to capital flows would probably slow GDP growth, but New Zealand's sound monetary and fiscal frameworks, and strong banking system, would limit the risk of a hard landing, the IMF said.

A global credit crisis sparked by problems in the United States' housing market last year has made lenders wary of parting with money, increasing competition for funds and raising the cost.

"The large scale of foreign borrowing and its short-term nature leaves New Zealand vulnerable to an adverse shift in investor sentiment," the IMF said.

"Given that most of the borrowing is undertaken through a relatively small number of banks that are able to tap the international market, the ability to roll over the funding is linked to their financial health and the financial health of their parents."

The IMF said New Zealand banks appeared profitable, well capitalised and with high loan quality. However, the fund cautioned that current tightening in international capital markets was putting upward pressure on bank funding costs and highlighting rollover risks.

"Going forward, the quality of their mortgage book (at 45 percent of assets) will have a strong bearing on banks' credit rating and their ability to roll over offshore funding."

New Zealand's largest banks are Australian owned -- Westpac, Bank of New Zealand (National Bank of Australia), ANZ-National (ANZ Bank), and ASB (Commonwealth Bank of Australia).

This month, rating agency Moody's downgraded its outlook on ANZ-National to stable from positive as a result of the global credit crisis and the slowing domestic economy.

Moody's said the stable outlook of New Zealand's largest bank was due to the very high probability of support from its parent, and the Reserve Bank's work to shore up the banking system.

The IMF said banks' hedging policies also reduced possible risk, and a large portion of debt was denominated in New Zealand dollars.

In 1998, a 25-percent fall in exchange rate and swings in capital inflows had little impact on banks, with profit largely unaffected because the recession was short-lived, and due to widespread hedging by banks and their corporate clients.

However, the country has now had a longer period of larger capital inflows, and rising domestic demand, inflation, growth and government spending.

The Reserve Bank has concluded that a 20 percent fall in house prices, and rising unemployment and declining household income would result in lower bank profitability, but no bank's capital position would be endangered.

Keeping inflationary pressures in check, restraining government spending, increasing liquidity and cutting interest rates could all help if offshore funding was disrupted, the fund said.

The IMF, in its annual assessment of the New Zealand economy, said the Reserve Bank's decision to raise rates last year was "appropriate" and helped moderate house price inflation and slow rapidly appreciating house and share prices.

The IMF also backed government plans to gradually reduce a large fiscal surplus, but cautioned that those steps should occur only once inflationary pressures eased.

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