Banks are being warned to reassess their approach when considering lending to the horticulture sector amid concerns over a labour shortage, according to the Reserve Bank's latest Financial Stability Report.
Horticulture lending, led by the kiwifruit industry, is growing at an annual rate of 15 percent, according to the report. But "banks will need to monitor emerging risks associated with this growth, in light of potential constraints to labour availability in the near term due to ongoing border restrictions".
The report took a sweeping look at the country's financial health, concluding that although New Zealand had been so far successful in managing the COVID-19 pandemic, there remained "considerable uncertainty about the economic outlook".
The country's financial system has so far been insulated from significant stress, thanks in part because it had built up its capital and liquidity buffers over the past decade.
As well as its warning over horticulture, the report also highlighted a "limited appetite" by banks for new dairy lending, which it said was a reflection of concerns around the cost of compliance with new environmental regulations on farm incomes, such as stock exclusion from waterways, a nitrogen fertiliser cap, and the introduction of agriculture to the Emissions Trading Scheme in the near future.
The agriculture sector had proved to be fairly resilient in the face of COVID-19, showing "relatively less strain" than other sectors thanks in part to the fact food production was considered an essential business during the lockdowns.
"The sector's resilience has also been aided by the comparatively rapid recovery seen in the Chinese economy," the report found.
Despite this, long-term vulnerabilities were said to "remain a considerable concern", with uncertainty surrounding global economic conditions.
Banks had been working with overextended dairy farmers and encouraging them to deleverage by taking advantage of favourable commodity prices and historically low interest rates to repay loan principles and "reduce their vulnerability to another dairy downturn. Despite this, there were still a number of dairy farms that remained financially vulnerable, the report stated.
"This is particularly significant as some dairy farms remain highly indebted after experiencing two downturns in the last decade, and require a high milk price just to remain operational.
"Furthermore, restrictions on foreign investment introduced in recent years continue to exacerbate issues with illiquidity in the farmland market."