New Zealand is in a better position than most advanced countries to face the global storm, given its sound macroeconomic policies, the International Monetary Fund said Wednesday.

Staff expects the New Zealand economy to contract by about 2% in 2009, with a gradual recovery over the medium term, the IMF said in its preliminary concluding statement of 2009 Article IV Consultation.

The global lender said downside risks in the outlook are high and linked to the unprecedented uncertainties surrounding the depth and duration of the global recession.

The IMF noted that the high level of short-term external debt, mostly owed by banks poses a key vulnerability for New Zealand. So far, good credit ratings and the depreciation of the exchange rate have allowed banks to refinance their external debt. Moreover, neither banks nor most borrowers have material exchange rate risk associated with their debt.

The Fund said the recent deterioration in the economic outlook, combined with the policy measures taken last year, have resulted in a sharp worsening in the fiscal projections over the medium term. The staff projection shows a deficit of 1.5% of GDP in 2008-09 and about 6% of GDP by 2012-13, with gross public debt getting close to 50% of GDP by 2013.

Such an increase in public debt would be larger than expected for the Euro area, but in line with forecasts for Japan, the U.K. and the U.S., the IMF said.

IMF's inflation outlook says headline inflation is expected to fall to less than 1% in December 2009 and to return gradually to the middle of the 1%-3% range by 2012-13. The IMF urged the Reserve Bank of New Zealand to continue to reduce the official cash rate.

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