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Key points:  The IMF is now projecting growth of just 1% (previous forecast of 3%) for 2011  The IMF reckons the NZ dollar is overvalued by about 5% to 20%  The IMF thinks NZ’s net public debt needs to be below 20% of GDP within the next 10 years

The International Monetary Fund has lowered its growth forecast for New Zealand, in a further blow to the nation’s economy that is being squeezed by the cost of two earthquakes that wrecked its second-largest city and continuing weakness in the housing and retail industries, according to an online report by the Wall Street Journal.

“The recent earthquakes may have a greater-than-expected negative impact on confidence and growth,” the IMF was quoted saying in a statement. “On the external front, a faltering of emerging Asia’s rapidly growing demand for commodities could adversely affect exports and income.”

The glum assessment for New Zealand’s economic outlook comes after gross domestic product, or GDP, had already contracted in the third quarter of last year as the economy remained sluggish and New Zealanders opted to pay down debt rather than spend. A Dow Jones Newswires poll of 12 economists expects fourth-quarter GDP, when it’s released Thursday, to show the economy had grown by a narrow 0.2% on the quarter.

The magnitude-6.3 earthquake that hit Christchurch last month killed more than 160 people and left about 10,000 dwellings uninhabitable and a further 100,000 homes damaged. The IMF had estimated damage from two major earthquakes that hit Christchurch in the past six months at 15 billion New Zealand dollars (US$11 billion), or 7.5% of GDP.

Following its review, the IMF said the nation’s economy faces further risks, with trading partners seeing increased challenges, mounting earthquake costs and volatile oil prices.

The IMF is now projecting growth of just 1%, down from a previous forecast of 3%, for 2011, supported by higher exports and the hosting of the Rugby World Cup later in the year. Assuming that the bulk of reconstruction takes place during 2012-16, growth in 2012 is expected to accelerate to 4%, it said.

The IMF said it supported the Reserve Bank of New Zealand’s decision on March 10 to reduce the official cash rate by 0.5 percentage point to 2.5% due to economic weakness, but it expects monetary stimulus will need to be removed once it is clear that recovery is under way in order to contain inflation.

The IMF also flagged concerns about the country’s level of foreign debt.

“Although public debt is projected to remain low by advanced-country standards, New Zealand’s large net foreign liabilities (about 85% of GDP) calls for fiscal prudence,” the IMF said, adding that net public debt needs to be reduced to below 20% of GDP within the next 10 years.

Concerns about debt have the IMF supporting a government plan to sell stakes in state-owned enterprises after Prime Minister John Key announced the possibility in January.

The IMF added that the New Zealand dollar was overvalued by about 5% to 20% due to all the uncertainties from a medium-term perspective. “Part of the overvaluation reflects the positive interest-rate differential, which may dissipate with eventual tightening by major central banks,” it said. – Source Dow Jones

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