Fitch: Australia Statement Broadly Consistent with Consolidation

Fri Aug 2, 2013 11:20am EDT

HONG KONG/LONDON, August 02 (Fitch) The continued adjustment of the economic assumptions underlying Australia's fiscal consolidation strategy in the latest Economic Statement remains consistent with a commitment to fiscal consolidation, in Fitch Ratings' view. But it limits the chance of any sharp improvement in the budget deficit in the short term. The Treasury appears to be taking a more conservative approach to its economic assumptions to reflect the weak global economic environment and its impact on Australia. It has cut its real GDP growth forecast for FY13/14 by 25bp to 2.5%, in line with our forecast that the Australian economy will grow at 2.5%-2.75% in calendar 2013 and 2014. The larger cuts to nominal GDP growth forecasts (FY13/14 down 125bp from the Commonwealth Budget in May to 3.75% and FY14/15 down 50bp to 4.5%) reflect how lower commodity prices are putting pressure on Australia's terms of trade position. The effect on tax receipts of lower nominal growth continues to put pressure on the Commonwealth budget, as we noted when we affirmed Australia's 'AAA' and Stable Outlook in late March, and acknowledged that risks to the government's economic projections could further delay fiscal consolidation. New revenue measures were confirmed in the Economic Statement, such as the levy on bank deposits and an increase in tobacco taxes. But even combined with a weaker currency these will not offset the impact of declining terms of trade and lower nominal growth. The government is therefore forecasting wider budget deficits than before for FY13/14 and FY14/15, and will not meet the goal set in May of balancing the budget in FY15/16. It expects the FY13/14 budget deficit to widen to 1.9% of GDP, from 1.3% in FY12/13. But the goal of returning the government's cash balance to surplus by FY16/17 remains. This suggests that the authorities remain committed to sound fiscal management. Australia's low general government debt, which we estimate was about 32% of GDP in FY12/13), means it has begun fiscal consolidation from a position of strength compared with many other high-grade sovereigns. The introduction of a levy of 0.05% on deposits of up to AUD250,000 should be neutral for Australian banks, which are most likely to pass the costs on to depositors. Contact: Art Woo Director Sovereigns +852 2263 9925 Fitch Ratings (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway Hong Kong Tim Roche Senior Director Financial Institutions +61 2 8256 0310 Mark Brown Senior Director Fitch Wire +44 20 3530 1588 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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