May 12, 2017 / 9:03 AM / 3 months ago

Fitch Affirms Australia at 'AAA'/Stable

(The following statement was released by the rating agency) HONG KONG, May 12 (Fitch) Fitch Ratings has affirmed Australia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'AAA'. The Outlook is Stable. Australia's senior unsecured local-currency bond ratings are also affirmed at 'AAA' and 'F1+'. The Country Ceiling is affirmed at 'AAA' and the Short-Term Foreign- and Local-Currency IDRs at 'F1+'. KEY RATING DRIVERS - Australia's 'AAA' rating reflects the country's high income levels, strong governance and effective policymaking institutions. The country's economy has grown for 25 years without a recession, despite navigating a mining investment cycle and volatile global conditions, benefiting from the flexibility offered by a free-floating exchange rate, credible monetary policy framework and low public debt. - Persistently high budget deficits have eroded Australia's fiscal strength relative to 'AAA' peers. The general government deficit averaged 3.5% of GDP between the fiscal year ending June 2011 (FY11) and FY15; this compares with 0.8% for the 'AAA' median. Australia's general government debt/GDP ratio was 34pp lower than the 'AAA' median in 2010, but the gap closed to almost zero in 2016. The deterioration in the fiscal position partly reflects the mining investment and nominal growth downturn, with the government balance sheet helping to absorb some of the impact on the wider economy. - Policy measures introduced in the FY18 budget, if fully implemented, will help lower the deficit earlier than Fitch had expected. The government estimates the measures will improve the budget balance by AUD19.8 billion over four years (1.2% of 2016 GDP). An increase to the Medicare levy contributes AUD8.2 billion and the introduction of a bank levy adds a further AUD5.5 billion. However, our estimate of the FY18 general government deficit remains unchanged at 2.2%, reflecting our expectation of higher infrastructure spending by state governments. The government's decision to not proceed with planned, but unlegislated, budget repair measures was already assumed in Fitch's September 2016 projections. - We expect gross general government debt (GGGD) to peak at a slightly higher level (42.3% of GDP in FY18) than our September 2016 projections due to new government debt financing of infrastructure projects. This includes a AUD19 billion loan for the National Broadband Network announced in November 2016 and the equity financing of Western Sydney Airport and the Melbourne to Brisbane Inland Rail. Fitch expects measures in the FY18 budget will lead to a lower GGGD path in the medium-term. - Fitch's fiscal forecasts are underpinned by steady economic growth. We forecast real GDP to expand by 2.8% in 2017 and 2.7% in 2018, faster than the 'AAA' median of 1.7% and 2.0%, respectively. This will be driven by greater production of natural gas, higher spending on infrastructure and a smaller drag from mining investment to offset a lower (but still positive) contribution from residential investment. The broad-based improvement in global demand so far this year, if maintained, would also support exports. The mining investment downturn continues to spill over to weaker private business investment in mining states, but we expect this to recede over the next two years. - High household debt, at 189% of disposable income in 4Q16, has been supported by rising house prices and low interest rates and is a vulnerability for the economy and fiscal position. Mortgage arrears have gradually increased over the previous 18 months, with a steeper rise in states with large mining exposure. An economic shock that leads to sharply higher interest rates or unemployment could make it more difficult for households to service debt and weigh on consumption and confidence. Large offset and redraw account balances (17% of residential mortgages outstanding) provide flexibility for some households, but the newest borrowers are unlikely to have built up significant balances or benefited from past house price appreciation. - Australia's banking system scores 'aa' on Fitch's Banking System Indicator (BSI), the joint highest of any sovereign. Strong capital positions provide banks with substantial loss-absorbing capacity and reduce the risk of financial instability in the event of a housing market shock. The sector is supported by strong regulation. The government's proposed bank levy will add to existing pressure on profitability from narrowing interest margins and slowing loan growth, but Fitch expects internal capital generation to remain strong. - A flexible exchange rate, strong financing flexibility and extensive currency hedging mitigates some of the risks from the country's high net external debt/GDP, which at 60.3% of GDP at end-2016 was the largest among 'AAA' rated sovereigns. However, a sustained reallocation of capital flows away from Australia by foreign investors could raise financing costs and put downward pressure on economic growth. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Australia a score equivalent to a rating of 'AAA' on the Long-Term Foreign-Currency IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The current Rating Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a downgrade. However, future developments that may, individually or collectively, lead to negative rating action include: - A sustained widening of the fiscal deficit, leading to a continued rise in the general government debt/GDP ratio. - A negative shock to the housing market that causes widespread household and banking system distress. - A negative external shock, such as a rapid decline in the terms of trade following a severe slowdown in China, which could lead to a sharp increase in the current-account deficit or a sustained reallocation of foreign capital. KEY ASSUMPTIONS -The global economy performs broadly in line with Fitch's <a href="https://www.fitchratings.com/site/re/895594">Global Economic Outlook, particularly China, which has become a key destination for Australian exports. Fitch expects China to expand by 6.5% in 2016, 6.3% in 2017 and 5.8% in 2018. - Fitch assumes an average iron ore price of USD55 per tonne in 2017, falling to an average of USD45 in 2018 (62% Fe CFR China reference). Contact: Primary Analyst Mervyn Tang Director +852 2263 9944 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Thomas Rookmaaker Director +852 2263 9891 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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