From Tim Toohey at Goldman Sachs:
The Prime Minister elect is promising a “thoroughly liberal government” promoting freedom of “individuals and markets” and promising to consult and explain the case policy change. It is clear that the Prime Minister-elect is targeting business confidence and individual freedom, in a step to reinvigorate the prominence of the ‘small L liberals’ within the party. Initial indication from Mr Turnbull is that the government will seek to serve its full term rather than move for an early election.
There are a number of uncertainties that will need to be resolved in coming days;
– Liberal Party will now have to re-negotiate its coalition agreement with the National Party, with the National Party announcing a party meeting tomorrow to defer any automatic agreement renewal. We view this as largely a formality.
– The Liberal Party will need to negotiate its position with the cross bench; the government needs 6 of the 8 cross bench representatives to vote for any prospective Coalition legislation.
– New portfolio allocations will be made in coming days in key portfolios such as Treasury, with government ministers indicating after the vote that Scott Morrison is likely to assume the position. Ms Bishop has indicated she intends to remain in the Foreign Affairs portfolio.
– It is unclear which policies will be subject to change under a new leader. Financial markets will be keen to gauge attitudes to the proposed policies such as taxation reform, including an increase in the GST, climate change policy, commitments to free trade agreements, deficit reduction strategy and whether a Turnbull government will support a more active role for counter cyclical government policy (including the use of infrastructure bonds and social bonds).
– It is also unclear whether Prime Minister Abbott plans on remaining in parliament and if there will be attempts from within the Liberal Party to destabilise the new leadership over time.
– The ALP will need to decide whether their leader will be best placed to counter a Turnbull/Bishop government into next year’s election.
We suspect that the business community will view Mr Turnbull as more business friendly and this has been reflected in the A$ rising upon the news of the leadership change.
Should the change in leadership result in a tangible lift in consumer and business confidence or a material shift in the nature of fiscal stimulus, there may well be significant implications for monetary policy direction. As we warned on prior changes in leadership, fillips in confidence due to change in leadership will prove transitory without a sustained improvement in the underlying economy. In this respect the Prime Minister-elect is closer to the end in the decline in the terms of trade and hence the erosion of the government’s taxation base, and is inheriting a much lower exchange rate and record low interest rates.