Country Reports
2019
February 22, 2019
Uruguay: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Uruguay
Description: This Article IV Consultation highlights that Uruguay has preserved macroeconomic stability in the wake of the turbulence in the region due to prudent policies and the accumulation of buffers over the years. With the worsening outlook and less friendly external environment, in the near term, policies should focus on maintaining resilience. In this context, additional efforts are needed to put debt on a firm downward trajectory and reduce inflation to within the target band. The IMF staff assesses that the external position is broadly consistent with fundamentals and desirable policy settings. The authorities and IMF staff have remained in broad agreement on the macroeconomic policy objectives, including maintaining public debt on a sustainable trajectory, keeping inflation low, and allowing exchange rate to adjust in line with fundamentals. Fiscal adjustment, however, has not proceeded as quickly as had been originally expected, and inflation has proven difficult to contain within the authorities’ target range.
February 22, 2019
Uruguay: Selected Issues
Description: This Selected Issues paper analyzes the sectoral trends and the impact of the real effective exchange rate (REER) changes on sectoral exports using the detailed product data from the United Nations’ Commodity Trade Statistics Database (Comtrade). This paper focuses on Uruguay’s product- and sector-specific global export market shares. It also estimates the sensitivity of these market shares to real effective exchange rate by using the product data from the Comtrade database and building on the work presented in IMF (2017). The paper estimates the elasticities of product market shares with respect to real exchange rates for Uruguay only. Rather than using time dummies to isolate the potential impact of the time trend, the lagged value of the change in shares as an additional independent variable has been added. The paper concludes that Uruguay’s manufacturing exports are sensitive to the changes in REER, and, accordingly, that productivity-enhancing measures to promote competitiveness would be beneficial.
February 21, 2019
Australia: Financial Sector Assessment Program-Technical Note-Supervision, Oversight and Resolution Planning of Financial Market Infrastructures
Description: This paper analyzes systemic risks related to Financial Market Infrastructures (FMI) in Australia, in particular central counterparties (CCP). Supervision and oversight of FMIs is well-established with supervisory expectations importantly strengthened over the past few years. It is recommended that the Reserve Bank of Australia considers reviewing its approach to payment systems oversight, in particular by providing greater clarity as regards requirements for systemically and less systemically important payment systems. The IMF team suggests that Australian authorities could benefit from the experiences of and lessons learned by other jurisdictions through their regular and more specialized coordination and communication efforts with other supervisors and resolution authorities. The authorities should also review, and could benefit from, the experiences of and lessons learned in the formulation and codification of Australia’s bank and insurer resolution regime. Enforcement powers for the supervision of CCPs and Securities Settlement Systems should however be strengthened in accordance with the Principles for Financial Market Infrastructures.
February 21, 2019
Australia: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Australia
Description: This Article IV Consultation highlights that Australia experienced only a minor downturn after the end of the mining investment and commodity price boom but, as elsewhere, the adjustment and rebalancing has been slow, with below-target inflation and low wage growth amid economic slack. Macro-financial vulnerabilities relating to high household debt and low housing affordability have become major concerns after a recent housing boom. The baseline forecasts entail a soft landing in the housing market, but a stronger market correction remains a risk. Overall, near-term risks to growth are to the downside, mirroring the global risk picture, with the impact of shocks potentially being amplified by high household debt. The IMF staff welcomes the authorities’ continued commitment to working actively with international partners to promote the global multilateral trading system. Macroeconomic policy support should remain in place until full employment and inflation in the target range are firmly within reach. The structural policy agenda appropriately targets innovation, infrastructure gaps, tax reform, and energy policy, although progress has been limited in some areas.
February 21, 2019
Australia: Financial System Stability Assessment
Description: This paper presents Financial System Stability Assessment of Australian financial systems. The report highlights that financial supervision and systemic risk oversight have been enhanced. And the authorities have taken successful policy action to calm rapid growth in riskier segments of the mortgage market. Restrictions on the growth of investor loans and the share of interest-only mortgages, as well as the introduction of stronger lending standards, appear to have led to a slowdown in mortgage credit growth, and the housing market is now cooling. Financial supervision shows generally high conformity to international best practices, although there are opportunities to close identified gaps and strengthen arrangements. Steps are recommended to bolster the independence and resourcing of the regulatory agencies, by removing constraints on their policy making powers and providing additional budgetary autonomy and flexibility. The paper explains that greater formalization and transparency of the work of the Council of Financial Regulators would further buttress the financial stability framework.
February 21, 2019
Australia: Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management
Description: This technical note analyzes the existing legal and institutional frameworks in Australia, including coordination arrangements and focuses on crisis preparedness, including recovery and resolution planning as well as the Reserve Bank of Australia’s (RBA) lender-of-last resort functions. The analysis highlights that Australia has a well-established framework for financial stability, surveillance and policy formulation and the resolution regime for financial institutions has been significantly enhanced since the financial crisis. Australian Prudential Regulation Authority (APRA) has made progress in developing recovery planning requirements for the banking industry, extending these from large to medium sized and smaller banks. However, there is a need to better integrate the recovery planning within the risk management framework and operational testing exercises and to significantly enhance APRA’s work on resolution planning, particularly for the largest banks. The paper recommends that the Australian authorities should introduce an ex-ante funded deposit insurance scheme, based on best international practice.
February 21, 2019
Australia: Financial Sector Assessment Program-Technical Note-Insurance Sector: Regulation and Supervision
Description: This technical note provides an update on the Australian insurance sector and an analysis of certain key aspects of the regulatory and supervisory regime. The note analyzes the practice in relation to selected Insurance Core Principles (ICPs) in the context of a wider discussion of key issues in regulation and supervision. Despite the negative impact of the low interest rate environment, the life insurance industry retains sufficient loss absorption capacity. The Australian Prudential Regulation Authority (APRA) has undertaken a comprehensive reform of prudential regulation while improving the consistency of the framework between life and general insurers. This focused review confirms that prudential regulation and supervision by APRA is reasonably conservative. The risk-based capital framework is reasonably conservative, which facilitates supervisory risk assessments. APRA has high technical capacity to conduct effective supervision. While there are some gaps in the regulatory regime, APRA seeks to address these through its supervisory process. The report recommends that APRA should expand and deepen its scrutiny of group activities, especially those entailing risky investments and material intragroup transactions.
February 21, 2019
Australia: Selected Issues
Description: This Selected Issues paper evaluates Australia’s experience with its principles-based fiscal framework. A key contribution of the paper is an evaluation of whether the medium-term budget balance anchor remains suitable in the post-Global Financial Crisis (GFC) economic environment. This paper analyzes the medium-term fiscal strategy (MTFS) in the context of the principles underlying the fiscal framework and offers suggestions for reinforcement. Comparing the alternative and current fiscal policy toolkits under a downside scenario demonstrates possible improvements to fiscal outcomes. The evaluation outlines that the operational principles of the MTFS have been consistent with the broad principles for sound fiscal policy laid out in the Charter, although implementation has involved difficult trade-offs. Options to deal with the treatment of debt, its accountability framework and its fiscal policy toolkit should help strengthen the statement and implementation of Australia’s fiscal strategy and reinforce its fiscal framework in the current and prospective economic environment.
February 21, 2019
Australia: Financial Sector Assessment Program-Technical Note-Systemic Risk Oversight and Macroprudential Policy
Description: This technical note reviews systematic risk oversight and macroprudential policy in Australia. The paper surveys key concerns affecting the Australian financial system, including the substantial increase in house prices and household indebtedness, the rising concentration of bank exposures, and potential volatility from the commercial real estate sector. The macroprudential policy response of the authorities has also been examined. Current arrangements have historically worked well and are based on a culture of strong inter-agency cooperation, and it is important that processes are appropriate to ensure ongoing focus on stability-related risks. The IMF team recommends that the authorities explore options for further extending their macroprudential toolkit, providing additional flexibility in responding to significant shocks, and reducing systemic vulnerabilities. The slowing in the growth of household indebtedness and lower house prices suggest that substantial new measures are not required at the current juncture, but a ‘readiness’ assessment would help to facilitate the introduction of new or expanded policy measures when required.
February 21, 2019
Australia: Financial Sector Assessment Program-Technical Note-Stress Testing the Banking Sector and Systemic Risk Analysis
Description: This technical note describes the financial stability analysis undertaken as part of the Financial Sector Assessment Program that primarily focuses on assessing the resilience of the banking system. Bank solvency appears relatively resilient to stress, although liquidity stress tests reveal some vulnerabilities given continued reliance on wholesale funding. The systemic risk analysis reveals a low degree of interconnectedness between the largest Australian banks and their global counterparts. However, the cross-border and interbank exposures data corroborates the systemic importance of the four largest banks and the view that the Australian banks are particularly vulnerable to external funding shocks. Cross-border analysis using country-level and individual bank-level supervisory data corroborates the view that the Australian banks are particularly vulnerable to external funding shocks given their dependence on wholesale funding from overseas. Policy recommendations made in the note include that additional investment in data and analytical tools would strengthen financial supervision and systemic risk oversight.