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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 fiscal management.