HONG KONG/SYDNEY, November 28 (Fitch) Fitch Ratings has upgraded Australia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AAA’ from ‘AA+’. At the same time, Australia’s Long-Term Local-Currency IDR has been affirmed at ‘AAA’. The Outlooks are Stable. The Country Ceiling has also been affirmed at ‘AAA’, and the Short-Term Foreign-Currency IDR at ‘F1+’.
“Australia’s ‘AAA’ Foreign-Currency IDR reflects its fundamental credit strengths, including its high value-added economy, strong political, civil and social institutions and its flexible policy framework,” said Art Woo, Director in Fitch’s Asia Sovereign Ratings group.
“The combination of low public debt, a freely floating exchange rate, a credible inflation target framework, and liberal trade and labour markets provides Australian authorities the flexibility to run strong counter-cyclical fiscal and monetary policies during both economic downturns and upturns. These factors have helped Australia weather a number of externally-driven shocks over the past two decades,” added Mr. Woo.
Fitch views Australia’s low general government debt-to-GDP ratio - 26.3% of GDP in FY2010-11 - as one of the sovereign’s standout strengths. In comparison, the ‘AAA’ peer rating group median was 55.7% of GDP in 2010. This provides Australia with the fiscal space to weather adverse shocks. The federal government remains committed to returning the commonwealth budget back to surplus by FY2012-13 (fiscal year ending 30 June 2013), although a further deterioration in global economic conditions could delay the achievement of this objective.
By contrast, Australia’s external finances remain weak by ‘AAA’ standards, albeit not the worst among rating peers; net external debt stood at a sizeable 53.2% of GDP in 2010 and the current account deficit is expected to remain sizeable, a longstanding feature of the Australian economy. This makes Australia relatively sensitive to external financing shocks when compared to ‘AAA’ peers. As evidence, Australia’s banking sector, which was and still is heavily reliant on external debt, faced difficulties accessing the international wholesale funding market in late-2008/2009. The banking sector has since reduced its reliance on short-term debt financing, to 21% in Q2 2011 from 30% of its total funding liabilities in Q1 2008.
The current boom in global commodity prices has helped Australia maintain healthy rates of economic growth against the backdrop of the global financial crisis. Australia’s five-year real GDP growth averaged 2.8% in 2010, well above both the ‘AAA’ peer rating group median of 1.4%. Moreover, Fitch forecasts that real GDP growth will average 3.4% in 2012-2013, as construction of resource-based investment projects (coal, iron ore and liquefied natural gas) accelerate, up from an estimated 1.5% for 2011.
The agency notes that this relatively high commodity dependence also poses risks. A large downturn in key commodity prices, leading to a sharp reversal in the terms of trade, could have significant knock-on effects on the domestic economy and public finances. However, in Fitch’s opinion, the economy and the authorities have the capacity and capability to weather such a shock.
Household leverage is high in Australia. The household debt-to-disposable income ratio was 153.5% in Q211, above the ‘AAA’ median, albeit lower than some rating peers. This can be linked to the run-up in housing prices over the past decade and a half. Official and private sector estimates show that growth in housing prices have been moderating since mid-2010, which should ease concerns that a large bubble has developed.
Looking further ahead, Fitch would view successful implementation of the government’s medium-term fiscal consolidation plans, particularly achieving budget surpluses and improving its net financial worth, as supportive for Australia’s credit profile. In contrast, large problems in the banking sector, whether driven by a loss of access to the international wholesale funding market or by a significant deterioration in asset quality, could put downward pressure on Australia’s ratings.