Image source: Naruedom Yaempongsa © 123RF.com
The report claims that the financial sector in New Zealand remains resilient to current risks both at home and on the international stage. However, the report also acknowledges that while “risks to the financial system remain elevated and are largely unchanged on the past six months”, there are points of concern, which could turn detrimental in time.
Expectedly, the highlight of the report was the role of debt, both locally and internationally, for the sustainability of the global economy and RBNZ stated that now is the time for the introduction of new improvements to the financial system in order to increase its efficiency, so that the system can address the growing debt rates in the future.
In that aspect the findings of the FSR are almost entirely analogous to our anticipations from earlier this week, when we advised you that global debt is growing at an alarming rate, which is also increasing the risk of a new debt bubble bursting (you can read more about it here). Here is what the Reserve Bank of New Zealand stated in the report:
"The most concerning global risks relate to high asset prices and debt levels in many large countries, particularly China. High government debt and already low interest rates limit the ability of governments and central banks to further support economic growth" [source]
This statement from the RBNZ parallels our earlier caution about the alarming rates of accumulating global debt that is outpacing the overall economic growth rates, which in itself inhibits the possibility of governments to sustain those growth rates in the long-term.
Also, while the global debt is proving to be an increasingly more concerning issue, the RBNZ showed that it is much better suited to tackle the rising debt levels at the local, national level.
“The Reserve Bank imposes loan-to-value ratio (LVR) restrictions on banks’ mortgage lending to improve the resilience of households and banks.[…] Slower growth in household debt and house prices, alongside safer lending by banks, have allowed the LVR restrictions to be eased in the past two years."
Conversely, the long-standing efficiency of the LVR has improved the investors’ outlook on the financial stability of New Zealand and the prospects of executing successful future business ventures. The effect of these upbeat sentiments can be seen in the rising business confidence index which, however, is improving at a relatively slower pace, and is considered as a somewhat of a disappointment.
Image source: TradingEconomics.com
Although the business confidence increased with 5.5 points in the month of May from the -37.5 points in April, this was not enough to offset the negative effect of global trade woes and the threat from the continually rising global debt on the kiwi. As a result, the NZDUSD pair has wiped out most of the gains resulting from the recent bullish correction and looks set to extend its losses below 0.64916 in an overarching bearish trend that was initiated on the 27th of March, as the RBNZ released its previous interest rate decision.
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