NZ facing worst downturn in 160 years: central bank

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One of the toughest COVID-19 lockdowns in the world will cost the New Zealand economy dearly and test the strength of its financial system.

The Reserve Bank of New Zealand on Wednesday said an economic contraction this year of almost 10 per cent would test the "resilience" of its banks in the coming months despite a ban on dividends and generous capital buffers.

The central bank warned that if tough restrictions are reimposed - most New Zealanders were confined to their homes until a month ago - unemployment could rise close to 18 per cent and house prices fall by almost half.

In this scenario, banks wouldn't have enough reserves to meet the legal minimum requirements, and could be forced to raise money from shareholders, the central bank said.

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New Zealand Deputy Prime Minister Winston Peters says PM Jacinda Ardern is taking too long to ease restrictions, and there is more to fear from the economic damage this may cause than the pandemic itself.  Getty

"Even accounting for an expected recovery in the second half of the year, this year’s projected decline in annual GDP is the largest in at least 160 years," the central bank said in its regular Financial Stability Report.

"The associated losses in income will cause financial distress for a significant number of households and businesses."

Level two restrictions

Prime Minister Jacinda Ardern's government on Monday reduced restrictions to level two, which allows up to 100 people to gather in pubs and restaurants, 50 at funerals and ten people in private residences. New Zealand has reported 21 deaths and has 22 active cases from the virus.

"There remains considerable uncertainty about the future trajectory of the pandemic, and how this will affect the New Zealand economy," the central bank said. "Under severe enough scenarios, the viability of banks would come into question."

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Commonwealth Bank of Australia-owned ASB Bank's headquarters in Auckland. Alamy Stock Photo

ANZ Banking Group and the Commonwealth Bank of Australia own the biggest New Zealand Banks. National Australia Bank and Westpac Banking Corp also operate in the country.

Housing and personal lending account for about 61 per cent of the banking industry's loans, making banks vulnerable to prolonged high unemployment, lower household income and a housing downturn.

On May 12, Westpac New Zealand suffered a serious payments failure that delayed transactions and access to accounts for a number of hours, due to a manual error by a supplier that triggered a lockdown of Westpac systems, the central bank said.

'Too risk averse'

Deputy Prime Minister Winston Peters said the government should have already ended almost all restrictions on daily life, including travel restrictions with Australia.

In a radio interview Wednesday, he suggested that the health advice to the government was too risk averse and New Zealand should be at level one restrictions, which would remove almost all controls on daily life.

He said the enemy at this point was not COVID-19, but the economic damage wrought by the disease, and his New Zealand First party had unsuccessfully pushed this argument in government, Stuff reported.

"The prime minister has actually admitted that, at the cabinet meeting she said it, there was serious concerns from New Zealand First that this was taking too long," he said. "We should have got out of this into a better place as soon as possible."

Parts of the financial system are already vulnerable, the central bank said, including some non-bank deposit takers, life insurance companies and credit insurers.