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Sustained population reduction plausible for Christchurch says RBNZ

Wednesday 11th May 2011

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Substantial temporary migration out of Christchurch could plausibly lead to some sustained reduction in population and reduce post-quake reconstruction, the Reserve Bank says.

In its latest Financial Stability Report, published today, the Reserve Bank said the deadly earthquake that struck Christchurch on February 22 was arguably the largest natural disaster to hit this country in terms of overall economic impact, as well as being one of the costliest in terms of lives lost.

Final reconstruction costs would be influenced by demand surge factors and associated localised inflation pressures from rising construction costs, the report said.

As costs rose, the nominal value of the reconstruction over the five to eight year rebuild horizon would likely be greater than the initial $15 billion estimate.

Subject to final loss estimates, the February earthquake would likely make a list of the top 35 earthquakes globally, relative to the size of the relevant national economy, since 1900.

The effect on financial institutions from the temporary disruption to economic activity in the region was likely to be manageable, the report said.

The major banks had an exposure to Christchurch customers amounting to around 10% of their loans and advances, while feedback from contact with the banks suggested initial provisions for bad debts could amount to a modest 0.1% of total loans and advances.

That figure would depend on the profile of economic recovery in the region, both in terms of how fast the rebuild took place, and the extent to which households and businesses decided to relocate outside the region.

Creation of the Canterbury Earthquake Recovery Authority was an important step in ensuring Christchurch remained a significant area of economic activity, the report said.

That would help underpin the residential housing market and maintain collateral values over the medium term.

That said, it was difficult to gauge property price dynamics in the region. It seemed plausible that bank losses could exceed the initial provisions, but remain small relative to banks' normal flows of annual profits.

The extent and speed of reconstruction in Christchurch was hard to predict.

While the financial stability implications would be influenced by the profile of recovery, given the high level of insurance and reinsurance, it appeared the financial consequences would be manageable for most key players.

Deputy Governor Grant Spencer said bank profits had recovered in the past six months and bad debt charges declined. Bank funding had moved to a more stable footing and capital ratios were relatively high.

While non-performing loans were elevated, they remained manageable, he said.

The Reserve Bank recently assumed the role of insurance sector regulator. Following the recent earthquakes, the Government had to support AMI to ensure an orderly claims process in Christchurch, Spencer said.

The Reserve Bank had accelerated its work programme in light of the earthquakes and was monitoring the insurance sector closely.

"While there remains considerable uncertainty over the extent of total final claims, we believe the overall industry is sound."

 

NZPA



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