As we await for the awe-inspiring Budget tonight, two fascinating insights into how the Australian economy is viewed, through domestic and foreign eyes.
First, the usual “everything is fine, relax, we’ve built a bomb shelter” narrative from the mainstream press, highlighting the perfect AAA rating:
There have been some scary-sounding predictions about the big deficits Joe Hockey is likely to announce in his second budget on Tuesday. The consultancy Deloitte Access Economics reckons last year’s record shortfall of $48.5 billion will be followed up by a deficit of $45.9 billion this year and $45.3 billion in 2015-16.
But, amid the gloom, it is worth remembering Australia is still in rarefied company when it comes to international credit ratings. As this graphic prepared by Fairfax Media shows, Australia is one of only nine countries with the highest AAA rating and with a stable outlook from all three agencies.
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Credit ratings are used by major investors such as sovereign wealth funds, pension funds and other big investors to gauge a nation’s credit worthiness. The better a country’s credit rating, the cheaper it is to borrow. So the ratings have a bearing on the Federal government’s borrowing costs.
A credit rating is not an assessment of a nation’s economic health but rather, the ability of the state to repay debt. However, the government’s capacity to repay any loan is largely dependent on the performance of the economy.
No mention of course of the rising warnings from the agencies, as recently as last week, nor the usual Pascoe backhand that they don’t matter anyway since they got the sub-prime crisis in the US all wrong.
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It is rarefied company – the Scandinavians with their world beating mix of socialism, low population, dynamic manufacturing and energy sectors, combined with Europe’s bank fortress in Switzerland, the capitalist dream in South East Asia, the finest currency manipulator and mercantile genius in Germany and then Australia’s North American commodity cousin, whose economy is a near mirror image.
And now for some reason from the rest of the world who can see past the blinkers, both political and iron ore bear market rally. First from Su-Lin Ong at RBC, who expects more warnings from the ratings agencies post-Budget:
“The lack of a credible medium-term fiscal consolidation plan is likely to keep the spotlight on Australia’s AAA, stable rating”.
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Bloomberg continues the reality check:
Australia’s debt, already rising faster than the euro zone’s, will keep ballooning as Prime Minister Tony Abbott opts to support growth and his own political fortunes rather than balance the nation’s finances.
The budget due Tuesday will forecast a wider shortfall in the year to June 2016 of A$40 billion ($32 billion), a Bloomberg survey of 20 economists showed.
With little prospect of a return to surplus this decade, net debt could swell to 17.1 percent of gross domestic product — still a fraction of European levels but up from just 3.3 percent in 2010
Australia’s economic commentariat like to focus on snapshots alone, pointing at a simple figure or “stack” to produce a simple conclusion, not the flow and potential 2nd derivative consequences of actions, treating the political economy like an Olympics medal tally.
As they opine about a “perfect” credit rating and “low” government debt, they ignore the reality that world markets, push the monetary and fiscal levers back and forth more so than any central bank or cigar smoking Treasurer.
