New York, June 12, 2012 — Moody’s Investors Service says that the outlook for Australia’s Aaa foreign and local currency ratings remains stable.
Australia’s Aaa ratings are based on four factors: the country’s very high economic strength; very high institutional strength; very high
government financial strength, and very low susceptibility to event risk.
The conclusions were contained in Moody’s annual Credit Analysis of the Government of Australia.
Economic strength is classified in Moody’s rating methodology as very high, based on the country’s economic diversity, the performance of the economy during the past two decades, relatively good growth prospects and high per capita income. During the global financial crisis and recession, Australia, while recording one quarter of negative GDP growth in the last quarter of 2008, did not have a recession, as did almost all other Aaa-rated countries.
The outlook is for some acceleration in the rate of economic growth, supported by the mining sector. In the next few years, investment in the mining sector (including LNG, iron ore, and coal) should remain strong, while private consumption continues to grow at about 3% annually, supported by a relatively strong labor market.
Thus, over the medium term, real GDP should return to near its level of the two decades before the financial crisis, in the 3.0-3.5% range. The risks to this scenario are primarily from external factors — global and East Asian growth and financial market developments (Europe or elsewhere) — that could affect Australia because of its dependence on external finance.
Moody’s assesses Australia’s institutional strength as very high, a classification shared by all Aaa-rated countries, and reflecting overall governance, rule of law, effective monetary and regulatory institutions, and transparency. And, in Australia’s case, these features are reinforced by a strong commitment on the part of the major political parties to sound government finance and low public debt levels, an important feature for a highly rated government
In its classification of government financial strength as very high, Moody’s notes that even at its peak, Commonwealth government and general government debt (including state and local governments) remains low by global standards, and the 2012-2013 budget forecasts a renewed downward trend in debt. As a result, the Commonwealth will continue to have one of the strongest financial positions among Aaa-rated governments.
The report also notes that as an advanced, diversified economy with strong, stable political institutions, Australia has very low susceptibility to event risk. Commodity-price and exchange-rate volatility affects the economy, but the most important risk remains the economy’s reliance on external capital inflows to finance the country’s high level of investment, lately dominated by the resource sector, but including residential construction. As a result of the high investment level, the country has consistently run current account deficits and built up one of the largest negative net international investment positions among advanced economies. Australia contrasts with some other current-account deficit countries in that it also has a relatively high saving rate, but the level of investment is even higher.
