From Moody’s:
Moody’s Investors Service (“Moody’s”) has today affirmed Australia’s Aaa government issuer ratings, the Aaa senior unsecured rating and the (P)Aaa senior unsecured shelf rating. The stable outlook is maintained.
The factors supporting the rating affirmation are:
1. Moody’s expectation that Australia’s demonstrated economic resilience will endure in an uncertain global environment;
2. A very strong institutional framework;
3. Stronger fiscal metrics than many similarly rated peers – despite the increase in government debt from previous low levels – which we expect to remain consistent with a Aaa rating over the medium term.
Moody’s notes that Australia’s reliance on external financing, elevated household debt and rising residential property prices pose risks. The stable outlook on the rating reflects Moody’s expectations that policy vigilance and response to these risks will be effective, and Australia’s sovereign credit profile will remain resilient to these risks.
Australia’s long-term local and foreign-currency bond and deposit ceilings remain at Aaa. The short-term foreign-currency bond and deposit ceilings remain at Prime-1 (P-1).
RATINGS RATIONALE
FIRST DRIVER — CONTINUED ECONOMIC RESILIENCE
Australia’s large size, high income levels, competitiveness, flexibility and growth record combine to offer exceptional economic strength which supports the Aaa rating.
The economy is quickly and effectively adjusting to lower commodity prices that have dampened a significant source of revenues and incentives to invest.
As a result of the deterioration in terms of trade, nominal GDP growth has slowed and we expect it to remain moderate in the next few years.
However, with a flexible labour market, a rapidly adjusting exchange rate and low interest rates, some services sectors, in particular tourism, education and housing construction have grown rapidly, creating jobs and supporting incomes in the economy.As the shift in economic activity continues, we expect real GDP growth to remain robust, at around 2.5% from 2017 onwards, after 2.8% in 2016.
Growth in services will continue to support employment and household incomes and consumption. Few high-income economies are growing at similar rates.Longer term, Australia’s potential growth is higher than most Aaa-rated sovereigns’. In particular population growth is stronger, aging is slower and financial provisions for an aging population are more advanced than in many advanced economies.
SECOND DRIVER — VERY STRONG INSTITUTIONAL FRAMEWORK
Australia’s monetary policy and banking regulation and supervision are vigilant and responsive to economic and financial conditions. The Reserve Bank of Australia (RBA) has a very long track record of delivering stable inflation at moderate levels. Compared with many other central banks in advanced economies, the RBA has retained more space for conventional monetary policy, the effectiveness of which is better established than that of unconventional measures.
On banking regulation and supervision, the Australian Prudential Regulation Authority has implemented measures that should diminish the probability and reduce the negative consequences of a potential downturn in housing. These include imposing moderate loan-to-value ratios on average and limiting growth in investors-led demand for mortgages, although low interest rates could dampen the effectiveness of these measures somewhat.
THIRD DRIVER — FISCAL METRICS TO REMAIN STRONGER THAN SOME Aaa-RATED SOVEREIGNS’
At 36.1% of GDP in fiscal 2015 (year ending in June 2015), Australia’s general government debt was somewhat lower than the 38.1% median level of Aaa-rated sovereigns.
Government debt has increased markedly from 19% of GDP in fiscal 2010. We expect it to rise further in the next few years, as fiscal consolidation proves challenging. Moderate nominal GDP growth will continue to dampen government revenues while the government faces political hurdles to the implementation of fiscal tightening measures, as it rules with a very thin majority in the House of Representatives and a splintered Senate.
The effectiveness of fiscal policy may be undermined somewhat.In this background, we forecast government debt to rise to close to 41% of GDP by fiscal 2017 and to just under 45% by the end of the decade.
However, Australia’s debt burden will remain consistent with a Aaa rating, albeit rising and no longer low. For instance, the debt burden will be lower than some other Aaa-rated sovereigns such as Canada or the Netherlands and not significantly higher than Sweden’s or Denmark’s (all Aaa stable).
We also expect debt affordability to remain very high, with interest payments broadly stable at around 4.5% of general government revenues.
The average yield on the stock of Australian Treasury bonds fell to 3.85% in June 2015, from 4.8% three years earlier, and has likely decreased further since. The maturity lengthened to 10.3 years from 7.7. We expect the strength of Australia’s institutions and its moderate debt burden to continue to shore up domestic and international investors’ confidence in the creditworthiness of Australian assets, maintaining the cost of debt at low levels.RATIONALE FOR STABLE OUTLOOK
The stable outlook on Australia’s rating reflects Moody’s expectation that Australia’s credit profile and related metrics will remain consistent with a Aaa rating.
Moody’s believes that Australia’s credit profile will be resilient to potential negative shocks. Australia is exposed in particular to two types of shocks.
First, the rise in and level of Australian households’ debt, fuelled by rising house prices, is large by international and historical standards.
It is, potentially, a source of vulnerability to a downturn in housing.
At the end of 2015, household debt amounted to 124.3% of GDP, at least 25 percentage points above any other high-income economy except for Denmark (Aaa stable, 122.5%). Australian household debt is also higher than in the US (Aaa stable), Ireland (A3 positive) or Spain (Baa2 stable) around their housing peaks (between 78.2% and 95.4% of GDP in 2007).Second, the Australian government and private sector’s dependence on external financing is a source of vulnerability since it exposes the domestic financial sector to global developments. Foreign investors can at times shift their investments to different markets more suddenly than domestic investors would.
However, there are factors that mitigate the potential sovereign credit impact of both the above risks.
Should house prices fall significantly, the strong capitalisation of Australian banks and, in general, their high intrinsic financial strength significantly reduce the risks of a banking crisis and the eventual costs for the sovereigns. Meanwhile, the robustness of Australia’s institutions bolsters the attractiveness of Australian assets to foreign investors and reduces the risks derived from significant dependence on external finance.
Moreover, in case of a downturn in the housing market or a tightening in external financing conditions, scope for monetary and fiscal policy stimulus would combine with the shown resilience of the economy to mitigate the negative impact on overall economic activity. In turn, the economy’s resilience creates a floor to the potential weakening of fiscal metrics in such scenarios.
WHAT COULD CHANGE THE RATING DOWN
Evidence that the economy’s resilience to negative shocks is diminishing would put downward pressure on the rating, in particular, if it led to severe challenges to the government’s or banks’ financing from international investors.
Indications that the hurdles to fiscal consolidation are higher than we currently expect, leading to a materially faster deterioration in fiscal metrics would also put downward pressure on the rating.
GDP per capita (PPP basis, US$): 47,389 (2015 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.5% (2015 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.7% (2015 Actual)
Gen. Gov. Financial Balance/GDP: -2.9% (2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.6% (2015 Actual) (also known as External
Balance)Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 12 August 2016, a rating committee was called to discuss the rating of the Australia, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutional strength/framework, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has decreased. The issuer has become increasingly susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies page on www.moodys.comfor a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
Not susceptible enough just yet, apparently.
