Fitch: Aussie Budget Enhances Long-Term Sovereign Risk Profile

Thu May 15, 2014 12:33am EDT

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, May 15 (Fitch) The 2014-2015 Australian Commonwealth budget reinforces the strong public finances and a credible policy framework, confirming the country is well-positioned relative to other 'AAA' rated sovereigns, Fitch Ratings says. The budget provides significantly greater clarity on the timing and scale of planned fiscal consolidation compared with the Mid-Year Economic and Fiscal Outlook released in December 2013. Consolidation towards a Commonwealth cash surplus (from an estimated -3.1% of GDP deficit in FY14) is now expected to occur by FY19. According to the plan, the deficit will decline by AUD60bn (0.6% of GDP per year) in the next four years, with general government debt peaking below our previous estimate of 33% of GDP in FY17. By comparison, 'AAA' rated sovereigns have an average public sector debt burden of 45% of GDP. Australia's general government debt is also considerably lower than the 80%-90% range that is the upper limit compatible with retaining a 'AAA' rating (provided the debt burden is on a downward trajectory and other fundamentals are robust). As we highlighted in our Australia report in April, the country faces an ageing demographic profile and the end of the mining investment boom. Its commodity dependence coupled with its relatively high external debt load, suggests that debt tolerance may be lower than for other high-grade sovereigns. Moreover, Australia's cyclically adjusted primary deficit is also higher than its peer group - -2.7% of GDP in 2013, according to the IMF compared, with -2.0% for the advanced G20 countries and +1.0% for the eurozone. As such, it is positive for Australia's long-term sovereign risk profile that the planned fiscal consolidation will be driven primarily by structural reforms to spending. These include increasing the pension retirement age to 70 by 2035, indexing pensions to CPI as opposed to wage growth, increasing petrol excise taxes, introducing medical co-payments, and tightening the requirements for unemployment and family tax benefits. We believe that the budget plan is realistic and achievable. The government's forecasts are based on slightly conservative economic assumptions, with planned real GDP growth coming in just below consensus expectations. This means that the risks of the scheduled deficit reduction falling short of expectations - owing to slower-than-expected economic growth - are low. The plan also calls for spending cuts to be aligned with an improvement in the economic cycle - most cuts are scheduled to take place in FY16 and FY17, when the government expects economic growth to re-accelerate. There are political risks to the full implementation of the budget bill, as the budget requires Senate approval. However, we do not believe that these pose a substantive challenge to the core elements of the plan. The government maintains a strong electoral mandate to execute the budget agenda until the next elections likely to take place in 2016, having just won its first election in September 2013 with a large majority in the House of Representatives Contacts: Thomas Rookmaaker Director Sovereigns +852 2263 9891 Fitch (Hong Kong) Limited 2801 Tower Two, Lippo Centre 89 Queensway Hong Kong Justin Patrie Senior Director Fitch Wire +65 6796 7232 justin.patrie@fitchratings.com Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@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. Applicable Criteria and Related Research: Australia here 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 FREE WEB SITE AT 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. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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