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New government's policies may damp migration, housing but NZ economic prospects stable: Moody's

Tuesday 31st October 2017

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Moody's Investors Service has retained its stable outlook for New Zealand's banking system and said while potential changes to government policies could have an impact on migration and housing it expects economic prospects and asset quality to remain strong in the next 12-to-18 months. 

The operating environment will "remain favorable" and the banking system's asset quality will be supported by strong economic conditions, low interest rates and a recovery in milk prices, said Daniel Yu, a Moody's vice president and senior analyst, in a note. 

Moody's expects New Zealand's real gross domestic product to grow 3 percent in 2017 and 2.8 percent in 2018. "Although growth will slow from 2016, it will remain strong compared to New Zealand’s global peers," Yu said. 

The country's economic growth will continue to be driven by net immigration, construction, and tourism, in addition to low interest rates, Yu said. While housing market risks remain high "they are unlikely to significantly undermine the system’s stability over this outlook period," he added.

Moody's said strong net immigration could slow if relative income prospects improve in Australia, where wages are higher, but that's unlikely to occur in the next few years. 

Also, while "potential changes to government policies on migration, following the new coalition government, could also potentially lower net migration," it expects population growth to remain stronger than in other advanced economies.

On the housing front, the ratings agency noted elevated levels of household leverage are showing some "initial signs of moderating" after the central bank imposed a series of macro-prudential tools to take some of the heat out of the market. However, it "continues to pose a key risk," it said. 

Moody's said it remains to be seen how effective the latest measures will be in slowing house price appreciation in the long term against the backdrop of strong immigration, ongoing housing shortages and low-interest rates. 

However, the agency said potential policies on housing from New Zealand’s new government, such as reductions in net migration and restrictions on house purchases by non-residents, could also contribute, or may even accelerate, the current moderation in house price growth. 

Moody's rates eight of New Zealand's 15 locally incorporated banks including ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, Westpac and Kiwibank. It also rates the Industrial and Commercial Bank of China, China Construction Bank and the Bank of China. These eight banks account for 90 percent of total system loans. 


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