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Australia's Triple A status intact despite debt surge
May 15, 2015 / 6:38 AM / 3 years ago

Australia's Triple A status intact despite debt surge

SYDNEY, May 14 (IFR) - Australia’s national budget statement has confirmed an increase in its sovereign debt burden amid a further deterioration in government finances.

The collapse in commodity prices, particularly those of iron ore and coal, has slashed tax receipts, prompting the Australian Office of Financial Management to raise its projection for total Treasury bond issuance in the 2014-15 financial year ending June 30 to A$72bn (US$58bn), up from A$68bn projected in last December’s mid-year statement.

After accounting for maturities of A$27bn, the new net issuance forecast is A$45bn.

The face value of Commonwealth Government securities outstanding is forecast to increase to A$518bn from A$367bn between the end of the current fiscal year and mid-2019.

The deterioration in state finances has raised concerns over Australia’s Triple A status. However, the country’s relatively strong fiscal position suggests its coveted Triple A status is not under immediate threat.

Moody‘s, which has its Aaa rating on a stable outlook, said the forecasts were “in line” with its expectations.

“Australia’s gross and net general government debt ratios are lower than many Aaa rated peers, and they cushion the sovereign credit profile somewhat from the negative impact of annual deficits, which are likely to persist until 2019,” said the agency in a post-budget note.

Australia is one of only nine Triple A rated sovereigns with stable outlooks from the three main rating agencies, alongside Canada, Denmark, Germany, Luxembourg, Norway, Singapore, Sweden and Switzerland.

Australia secured its position after running fiscal surpluses in all but one year from 1997 to 2008, and lowering government debt from over 40% of GDP in 1995 to below 10% in 2008.

Six successive annual fiscal deficits have raised general government gross debt to more than 30%, but it remains well below the 45% median for Triple A rated countries.

Deficits

Australia is now forecasting a fiscal deficit of 2.5% of GDP for FY2014-15, falling to 2% in FY2015-16 before returning to a modest surplus of 0.2% in FY2018-2019.

To bridge that gap, Treasury bond issuance in FY2015-16 is expected to be around A$74bn and, with A$35.8bn maturing, net issuance is forecast to be A$38.2bn. Sales of Treasury index-linked bonds are expected to amount to A$4bn in FY2014-2015 and FY2015-2016.

The AOFM is also looking to divest its remaining A$4.6bn holdings of residential mortgage-backed securities to recoup some of the money, but this will make only small inroads into the Commonwealth debt total.

Much may depend on iron-ore prices going forward because any 10% change boosts or reduces government revenues by around A$4bn per annum.

Federal Treasurer Joe Hockey now forecasts an average price over the next three years of US$48 per tonne. This is down from last December’s US$60 per tonne forecast, but well above the US$35 he indicated at the beginning of April.

Iron-ore prices tumbled from a peak of US$190 in February 2011 to under US$50 in early April 2015 before recovering to US$62 last week.

Moody’s went on to say that Australia’s Aaa rating also had the support of the flexibility and dynamism its economy had shown over the last several years.

“This dynamism will be tested over the coming years, if global commodity prices remain subdued: whether non-commodity investment can offset lower commodity-related investment will determine medium term growth trends,” Moody’s said. (Reporting By John Weavers. Editing By Daniel Stanton and Steve Garton.)

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