The New Zealand dollar needs to be 15 per cent lower to bring the nation's current account deficit to a more sustainable level, according to the International Monetary Fund.
New Zealand's external vulnerability is cited as the key medium-term issue for the country, which will need a better national savings rate and reduced reliance by banks on foreign funding, according to the IMF's concluding statement on the economy. That reliance on global funding assumes the Canterbury rebuild gathers pace and global interest rates get back to more normal levels.
The global lending agency sees New Zealand's current account deficit rising to 7.1 per cent of gross domestic product and net external liabilities to 84.8 per cent of GDP by 2016. That's worse than the Treasury's latest forecasts for a 6.9 per cent current account deficit and 80.8 per cent net foreign liability deficit in the 2016 March year.
"Staff analysis suggests that the New Zealand dollar is currently stronger than is consistent with a level of the current account deficit that is more sustainable over the long term," the report said. To stabilise external liabilities at the 2009 level, "the New Zealand dollar would need to be about 15 per cent weaker than its current level."
New Zealand's trade-weighted index fell to 69.83 this morning from 70.08 yesterday. The Budget economic forecasts project the TWI falling to 63.0 in 2016, the end of its forecast period.
In April, the IMF preliminary statement on New Zealand backed the government's plan to get its own books back in the black by 2014/15, which will unwind fiscal stimulus as the Canterbury rebuild gets under way and offer headroom in the event of another global meltdown.
The IMF held to the same line in its concluding statement, saying lower net government debt will help contain the current account deficit over the medium term and reduce external vulnerability by lifting the national saving rate.
However, it questioned whether New Zealand's unique position, in that most of its external debt is private rather than public, raises the question "whether this would limit the ability of budget deficit reduction in the case of New Zealand to bring about a reduction in foreign liabilities more broadly."
The IMF also backed the government-appointed Savings Working Group's recommendations to shift more of the tax base to consumption over the medium-term and to index tax on interest income to inflation.
It said New Zealand's economy continues to grow at a modest pace, with GDP forecast to expand 2.3 per cent in 2012, rising to 3.2 per cent in 2013, though the size and timing of the recovery is uncertain due to the delays in the Canterbury reconstruction.
Europe's financial woes and a slowdown in the Chinese and Australian economies are seen as the biggest risks, though New Zealand has space to respond to adverse shocks, the report said.
The IMF said there is a medium likelihood of declining export demand and deteriorating terms of trade, which would reduce GDP growth in New Zealand. That could lead to a fall in household income, which would lead to lower house prices sap consumer demand and growth, it said.
If that downside scenario occurred, the IMF estimates it will trim half a percentage point from 2012 GDP growth and 1 percentage point in 2013.