RBNZ Deputy Governor hails strong balance sheet of NZ Inc


The strength of New Zealand Inc.’s balance sheet before the pandemic played a very important role in the “better than expected results” for our economy, said Reserve Bank Deputy Governor Geoff Bascand.

In a speech at the Citi Australia & New Zealand Investment Conference 2021Bascand said the health of corporate, household and bank balance sheets before the recession was critical.

Rather than the ‘negative cycles of stressful deleveraging and credit restrictions due to limited equity or collateral that were seen during the 1990 recessions and the GFC, 2020-2021 saw a rapid return to credit growth. households and a business sector that has been able to evolve rapidly in growth rather than in repair “.

“In addition, with stronger capital and liquidity positions, the banking system has been able to meet rather than limit demand for credit,” said Bascand.

“We have learned that stronger balance sheets reduce the magnitude of a downturn and facilitate a stronger and faster recovery.”

Although we are “not out of the woods yet” and the uncertainties surrounding the current Delta epidemic remain, “we are reassured by the resilience that comes from strong balance sheets.”

Bascand said the ongoing global Covid-19 pandemic had been a unique shock to New Zealand and the world.

“Yet it was also what did not happen that was noticeable. Despite New Zealand’s output level down 10% in the second quarter of 2020, unemployment rose only modestly and then fell. much faster than expected during the second half of 2020 and the first half of 2021.

“Against almost all expectations of a fall, house prices have risen sharply; and non-performing loan ratios seem to ignore Covid altogether. This is in stark contrast to previous experiences of severe economic downturns in New Zealand. “

Budgetary and monetary support had played a major role in supporting the economy. The government has provided extraordinary support through programs like the Small Business Cashflow Scheme and the Wage Subsidy – allowing businesses to retain employees and close much of the income gap for businesses and households. Historically low borrowing rates, facilitated by monetary policy, have supported corporate and household cash flow and boosted asset prices and investor confidence.

“The interconnected nature of these sectors and their balance sheets is very important. The strong track record of the public sector before the pandemic enabled a significant fiscal response which in turn supported the private sector.

“Healthy pre-recession private and financial sector balance sheets have remained strong, supporting the efficient functioning of the financial system, enabling credit growth to respond quickly and helping monetary policy get to work and meet its targets. price stability and employment in the face of a downturn.

“… Strong balance sheets for households, businesses, financial institutions and the public sector before the pandemic helped maintain a healthy financial system and a faster economic recovery than after previous deep recessions.”

But Bascand said while the economy has recovered strongly from the 2020 slowdown, global uncertainty and the local impacts of more recent health and economic restrictions currently remain barriers to growth.

“Household and government balance sheets appear a little more vulnerable now than they were at the start of the pandemic and the uncertainty surrounding the Delta variant outbreak continues to weigh on growth prospects.”

Important policy decisions will be faced by fiscal decision-makers over the next 20 years to change spending, revenue and debt trends to ensure that the government’s balance sheet does not become “a threat to economic resilience, rather than a threat to economic resilience. support like it did during the pandemic, ”says Bascand.

“The rise in house prices – to levels that exceed what we think are sustainable – has also been accompanied by some growing risks regarding the level and composition of household debt. housing prices and LVR restrictions, debt-to-income ratios (DTIs) have continued to rise and new mortgages are increasingly exposed to the risks of falling house prices, falling incomes or falling rates. higher interest. rising interest rates. “

Bascand noted that banks were also in a much stronger position before the pandemic than in previous years. Capital ratios had improved following the tightening of Basel requirements and rising investor expectations, and dividend restrictions introduced in response to anticipated loan losses associated with the pandemic made them even stronger.

Prudential policies introduced since the global financial crisis also meant that banks were less dependent on short-term funding and had stronger liquidity positions.

“At the onset of the pandemic, when markets started to seize up, banks had enough funding from longer, more stable sources to withstand volatility until conditions stabilized. “

Bascand said that real estate and land are the largest component of household wealth, and mortgages are by far the largest component of household financial liabilities; hence the emphasis placed by the Reserve Bank on housing in its assessment of the risks to household balance sheets.

“While households’ financial assets have grown dramatically, with the rapid growth in retirement pensions (Kiwisaver) and investment in equities, rising house and land prices have meant that household balance sheets are no longer diversified than in 2006.

“Households entered the pandemic with debt levels similar to 2006, but well above 1990 levels. However, this debt turned out to be less onerous. The fall in long-term interest rates has meant that household debt service has remained broadly in line with In addition, LVR restrictions have reduced the number of heavily indebted households, and the increase in house prices has further increased. improved equity positions.

“Household debt has become a bit more concentrated, with larger mortgages among fewer households. There has been a growing share of high debt-to-income lending, which has continued throughout the pandemic. This means mortgages are more susceptible to shocks to their income Fortunately, fewer business bankruptcies and wage subsidies keeping employees connected also means that most households have not suffered a loss of income and that wallets mortgage banks have not been seriously stressed.

“With few mortgages facing stress from a relatively low number of business failures and low unemployment, house prices, against all projections, have risen sharply. This means that house prices have had an overall positive impact via the accelerator effect: household consumption has been strong on due to high house prices and it is no exaggeration to say that the residential construction sector is booming. While this means that the housing market has acted to support the economic recovery, it has resulted in other housing affordability and unsustainable price issues. “


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