The Reserve Bank of New Zealand has issued its strongest warning yet about the economy becoming unbalanced, arguing in its annual report there was a risk of a reversal of recent improvements in New Zealand's current account deficit. (Update 1 includes further comments from Reserve Bank Governor Alan Bollard.) Here are the key quotes from RBNZ Governor Alan Bollard in the bank's annual report released today:
New Zealand had escaped major damage in the worst global financial crisis in decades, but the experience has highlighted imbalances and vulnerabilities, the bank said. "Prior to the crisis, households had been consuming beyond their incomes, borrowing heavily offshore through their banks. In the past two years there has been a substantial correction in household savings and the external payments imbalance. However, further improvements will be needed to stop our international debt position from mounting further," Reserve Bank Governor Alan Bollard said today, when releasing the Annual Report. The recent appreciation of the exchange rate has not supported the shift towards the export and import-competing industries that will be necessary to improve this situation, he added. "On these trends, there is a real risk that recent improvements in the external balance will be reversed."
Bollard wrote these comments in his Governor's Statement on pages 5 and 6 of the RBNZ's annual report released today. The statement was written of August 17:
Bearing in mind this has been a period of intense uncertainty, we now think we are through the worst. The banking system has held up reasonably well and the macro-economy has not sustained major damage. But the experience has highlighted the imbalances and vulnerabilities in New Zealand that we had previously alerted to. Households have been consuming beyond their incomes, they have borrowed heavily for housing, funding their debt through mortgages. This situation is reflected in New Zealand's very large current account deficit. Banks have funded much of this credit growth through relatively short-term foreign loans. In the new world this current account position will need to improve significantly to stop our international debt position mounting further. To date, the exchange rate has not been supportive of a shift in production towards the export and import-competing industries of the economy that will be necessary to improve this situation. At some point the financial markets may become uncomfortable if New Zealand continues to run such large and persistent current account deficits. We can take some important lessons from the experience of the last few years.
The Reserve Bank also reported a NZ$906 million net profit after massive trading gains on foreign exchange. It more than tripled its dividends to the government to NZ$630 million. The Reserve Bank said its senior executives had frozen their pay.
In recognition of the seriousness of the financial crisis, the Governor, Deputy Governor and two Assistant Governors requested they be given no remuneration increase in calendar year 2009.
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