December 20, 2016 / 8:25 AM / 10 months ago

Fitch: Australia Debt Change Modest From Wider Deficit Forecast

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, December 20 (Fitch) Australia's public debt ratios are likely to peak later - and at a higher level - than previously expected by the government and Fitch Ratings as the economic outlook weakens. However, the debt trajectory remains consistent with our 'AAA'/Stable sovereign rating on Australia, most recently affirmed in September. The government increased its budget deficit forecasts for the underlying cash balance by a cumulative AUD10.3bn (0.6% of GDP) for the next four years, largely owing to lower expectations for real GDP growth and wage inflation, according to its Mid-Year Economic and Fiscal Outlook (MYEFO), released on Monday. It also projected gross and net debt ratios would peak in FY19 (12 months to end-June), a year later than forecasted six months ago in the 2017 budget. That said, revisions were smaller than those that have been made in recent years, mainly in response to sharp falls in commodity prices. <iframe src="//e.infogr.am/dfa92ba0-2f1b-455a-b1d8-87aef8801177?src=embe d" title="Australia fiscal" width="550" height="678" scrolling="no" frameborder="0" > Fitch still expects the government to reduce its deficit at a slower rate than official forecasts. The MYEFO abandons the practice of assuming commodity prices will remain at recent averages; instead, it factors in a steady decline from current levels, though using price assumptions that are still higher than our own. We also believe the government will find it hard to deliver on hitherto unlegislated spending cuts assumed in the MYEFO, worth a cumulative AUD13.2bn (0.8% of GDP) by FY20, given that the coalition government lacks a majority in the Senate. The government has made some progress on budget repair through the legislature since the July election, saving AUD6.3bn in the Omnibus Savings Bill and raising AUD4.7bn in revenues through increasing tobacco excise. However, forming a political consensus over the remaining measures will be considerably more challenging. General government debt is now likely to peak at a level slightly higher than the 40.4% of GDP that we forecast for FY18 at the time of our September review. This would still be broadly in line with the median public debt/GDP ratio for 'AAA'-rated sovereigns, of 42%. However, the deterioration since 2007 - when general government debt was less than 10% of GDP - has eroded the sovereign's buffer against shocks. A housing market downturn or another slowdown in the global economy, for example, could weigh on Australia's rating if it resulted in further significant deterioration in public finances. Australia's fiscal outlook is sensitive to economic performance, a risk highlighted by the -0.5% qoq fall in Australia's GDP in 3Q16, the first contraction in five years. Some of the factors behind the decline are likely to prove temporary - public investment fell sharply after a strong second quarter, construction activity was hampered by poor weather, and coal-mine disruption held back exports. Furthermore, the drag from falling mining investment should continue to fade in coming quarters, while real exports will be boosted by LNG projects reaching the production stage. However, last quarter's data also showed a slowdown in consumer spending growth - in keeping with subdued wage gains - and continued weakness in non-mining investment. Fitch had previously expected the economy to expand 2.9% in 2016 and 2017, but those forecasts now face a higher risk of downside adjustments. Contact: Mervyn Tang Director Sovereigns +852 2263 9944 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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