Middle East conflict: Warning over Kiwis' ability to pay back debt

• Reserve Bank warns of heightened uncertainty due to Iran war
• Economic recovery expected to be "somewhat slower"
• Financial institutions well-placed to support economy

Risks to financial stability have increased due to the Middle East conflict, with a bleaker outlook for the economy, potentially making it harder for borrowers to service debt.

In its half-yearly Financial Stability Report, the Reserve Bank (RBNZ) stressed the country's financial system remained resilient, and the banking system was well-placed to support customers even if conditions worsened.

The RBNZ said the longer the Iran war continued, the greater the risks to global financial stability, with New Zealand already feeling "significant economic effects".

Governor Anna Breman said high diesel prices were having the biggest effect on the transport and logistics sectors, as well as primary industries, including forestry and fishing.

"While economic growth had been recovering prior to the conflict, we are now likely to see a somewhat slower recovery, affecting job growth and debt servicing," Dr Breman said.

The RBNZ said banks had strong capital and funding buffers, meaning they were not only "well-placed" to help struggling customers, but also manage stresses in offshore funding markets.

It said stress testing results showed banks' ability to withstand significant economic shocks, including geopolitical events like the Middle East conflict.

The RBNZ expected the impact on insurers to be limited, noting health insurers have raised premiums and adjusted policies following several years of high claims costs.

The RBNZ said it was working on a stress test of life and health insurers.

Fuel prices close to their highest levels in 50 years

Unsurprisingly, the RBNZ said higher oil prices will increase costs for firms, including those already facing weak demand.

"Prices for these important inputs are now close to their highest levels in the past 50 years after adjusting for inflation," the RBNZ said in its report.

It warned that in addition to increased costs for firms, higher oil prices will reduce consumers' spending power.

"Higher near-term CPI [consumer price index] inflation due to the conflict will reduce real wages," the RBNZ said.

"While it seems unlikely at this stage that the impact on real wages will be as large as it was over 2021/22, even a small decline in spending power could create financial hardship for some households given the existing cost-of-living pressures."

Meanwhile, low profitability in recent years meant firms were in a "more vulnerable position".

"Business deposits were elevated after the pandemic, given fiscal support and the strong economic recovery," it said.

"However, over the past three years, business deposits, particularly for smaller firms, have declined as a share of GDP [gross domestic product]."

The RBNZ said mortgage arrears have also declined from the recent peak as the economy improved, with non-performing loans at around 0.6 percent of lending.

However, it said arrears and non-performing loans remain higher than pre-pandemic levels.

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