Dagong Global Credit Rating Co., Ltd.
March 7, 2018
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided to maintain both the local and foreign currency sovereign credit ratings for the Commonwealth of Australia (hereinafter referred to as “Australia”) at AAA and AA+ respectively, each with a negative outlook. Australia’s policy remains consistent; public investment helps facilitate steady economic growth; government solvency remains at a high level because of the country’s great wealth creation ability and strong financing ability. However, high private-sector debt and real estate bubble risks pose potential threats to financial stability, thereby restraining government solvency.
The main reasons for maintaining Australia’s sovereign credit ratings are as follows:
1. The stability of Australia’s policy and credit environment is expected to remain. Australia has very limited space for policy flexibility. Therefore, policies pursued by the new Prime Minister Malcolm Turnbull, such as improving public infrastructure, attracting foreign investment, and diversifying exportation are all expected to be maintained, providing a favorable political environment for optimizing economic structure and stabilizing economic growth. Simultaneously, loose fiscal policy and abundant liquidity will continue providing credit support for Australia’s real economy.
2. In the short term, the economy will grow moderately and structural constraints will exist for the long run. Increases in public infrastructure investment, a reduction in corporate tax burden, and the encouragement of private investment will all help stimulate investment and soften the adverse impact on export caused by insufficient demand of commodity and limited space for price hikes. It is predicted that Australian economic growth will increase to 2.6% in 2018 and 2.7% in 2019, respectively. With the country’s tightening immigration policy, aging population and low labor force participation rates will place more constraints on the country’s economy. The Australian economy is expected to maintain a growth rate of 2.6% in the medium and long term.
3. The structure of the government’s repayment sources tends to improve, thus providing greater security. Steady economy growth will continue to help generate additional fiscal revenues. It is forecasted that the Australian government fiscal deficit will drop to 1.3% and 0.9% in FY2017/2018 and FY2018/19, respectively, while the ratio of government financing needs to fiscal revenue at the same period will respectively decrease to 18.0% and 13.5%, thus government financing needs will gradually decrease year by year. Additionally, financing costs are relatively low and debt financing capability is relatively strong. As a result, the security of government repayment sources will be improved.
4. In the medium and long term, government debt and gross external debt will decline slowly. It is projected that the ratio of Australian general government debt to fiscal revenue to rise slightly to 123.1% in 2018 and will decline to 121.1% in 2019, thereafter indicating a downward trend. Government debt is mainly comprised of medium-to-long-term debt and government solvency in local currency is stable. In FY2016/17, Australia’s gross external debt burden decreased by 6.8 percentage points to 112.1% year on year. Although external liquidity continues to be fragile, the strong Australian dollar will continue supporting the stability of government solvency in foreign currency.
In the short term, although the Australian government has adopted policies to manage property bubble risks, yet the tightening international liquidity, the lower status of ruling party in parliament, and the frequent replacement of party leaders will all undercut the ruling party’s governance and policy implementation. Consequently, threats to financial robustness from heavy private-sector debt and property market risks should not be ignored. Meanwhile, the mounting pressure from Australian dollar depreciation will incur increased external liquidity risks, and it will affect government solvency across the board. Therefore, Dagong maintains a negative outlook for Australian local and foreign currency sovereign credit ratings over the next 1-2 years.