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March 24 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Australia's Long-Term
Foreign and Local Currency IDRs at 'AAA'. The issue ratings on Australia's
senior unsecured local currency bonds are also affirmed at 'AAA'. The Outlooks
on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'AAA' and
the Short-Term Foreign Currency IDR at 'F1+'.
KEY RATING DRIVERS
The affirmation of Australia's sovereign ratings reflects the following factors:
Australia's economy rests on strong underlying economic and institutional
fundamentals, including a strongly developed, high-income and flexible economy,
supported by a credible policy framework and effective political and social
institutions. This provides for a high degree of resiliency to shocks.
Australia's real GDP growth is high relative to peers. The average real GDP
growth rate of 2.4% over the past five years, that included the global financial
crisis, is double the 'AAA' peer rating group median (1.2%). Although the end of
the mining investment boom that supported growth over the past years has now set
in and there are still substantial uncertainties surrounding the outlook, Fitch
expects GDP growth to hold up quite well: 2.6% for 2014 and 2.8% for 2015.
The public debt burden is relatively low at 27.6% of GDP. This fiscal strength
relative to peers is likely to be reinforced by the fiscal consolidation that is
expected in the coming years. Fitch expects the general government budget
deficit, combining the central and state government balances, to rise to 4.1% of
GDP in the financial year ending 30 June 2014 (FY14), before falling to 2.5% of
GDP in FY15. The relatively new central government is in the process of
preparing its first federal budget to be presented on 13 May. It has not
announced any concrete measures yet, but the budget is likely to include
significant spending cuts on the basis of recommendations by the National
Commission of Audit. In the next two years or so, the consolidation may turn out
stronger than indicated by the numbers in the Mid-Year Economic and Fiscal
Outlook of December 2013.
The Reserve Bank of Australia views the pick-up in the housing market as a
welcome substitute for the mining investment boom and central in the
transmission of the accommodative monetary policy. House prices increased by
close to 10% in 2013 nationwide and by 14% over the last 12 months in Sydney. So
far, credit growth has not picked up substantially, with growth in total credit
of 4.1% yoy and housing credit of 5.6% yoy in January. A sustained housing
market boom may, nonetheless, lead to a build-up of vulnerabilities, which could
at some stage impact GDP growth and bank balance sheets.
The banking sector remains resilient. Major banks' capital holdings are
currently rising and their profitability is expected to remain solid through
2014, providing a buffer to absorb a possible asset quality deterioration. The
system seems well-supervised. Australia is one of only three countries that
attract Fitch's highest banking system indicator (BSI) score of 'aa'.
The external sector generally remains a weakness relative to peers. Fitch
expects a current account deficit of 3.2% of GDP for 2014, while the 'AAA' peer
median is a 6.0% surplus. The basic balance (current account plus FDI) shows a
deficit, which is expected to widen slightly as mining investment declines. Net
external debt (close to 50% of GDP in 2013) is more than double the median for
'AAA' peers (21%) and is forecast to increase further. Exchange rate flexibility
is a strength, however.
Since the Outlook is Stable, Fitch does not currently anticipate developments
with a high likelihood of leading to a rating change. However, future
developments that could individually or collectively, result in a downgrade of
the ratings include:
- Deterioration in external balances. Due to Australia's strong commodity
dependence, a sustained and rapid deterioration in the terms of trade, most
likely in the context of a severe slowdown in China, could have a strong impact
on the current account, as well as on economic growth and public finances.
- Large-scale problems in the banking sector. Such difficulties could result
from severe asset quality deterioration - e.g. in the context of a severe
slowdown in China - and could lead to a sudden loss of investor confidence,
which would negatively impact wholesale refinancing.
- Failing economic rebalancing. The end of the mining investment boom puts
pressure on other sectors to support growth through increased productivity and
competitiveness. A sustained period of very low real GDP growth and increasing
unemployment would negatively impact the public and financial sector balances.
The ratings and Outlooks are sensitive to a number of assumptions:
- The global economic environment remains conducive for global trade and
investment flows. In particular Fitch assumes commodity prices do not suffer a
sharp correction and that China, which has become a key destination for
Australian exports, does not experience a sharp and severe economic downturn.
- Fitch's forecasts for the general government balance and debt levels are based
on the assumption that the Australian authorities remain committed to sound