Singapore, April 20, 2016 -- Moody's Investors Service says that credit fundamentals in Australia
(Aaa stable) remain robust, with moderate gearing in the corporate
sector, a resilient banking sector, and sound macroeconomic
trends all providing support.
However, subdued commodities prices are beginning to challenge some
sectors of the economy and some states. Moreover, risks related
to elevated property prices and Australia's dependence on external
financing remain.
"Australia's key economic metrics—including GDP growth and
unemployment—will continue to outperform most developed economy
peers," says Marie Diron, a Moody's Senior Vice
President for the Sovereign Risk Group.
"However, government debt will rise from around 35%
of GDP for the fiscal year ended 30 June 2015 to 38% of GDP in
the fiscal year ended 30 June 2018, which will limit the government's
room to buffer against potential negative shocks through fiscal easing,"
adds Diron.
Moody's explains that government debt will increase further.
First, subdued commodities prices will continue to weigh indirectly
on government revenues through weaker corporate and income tax receipts.
Second, broad-ranging measures to raise revenues are no longer
being considered while possibilities to restrain spending will be limited
by commitments on welfare, education and health expenditure.
"As for the pressure on resources-oriented sectors,
such pressure is unlikely to let up," says Patrick Winsbury,
a Moody's Associate Managing Director for the Corporate Finance
Group.
"Iron ore and coal producers and resource-oriented states
are coming under particular strain, resulting in some downward ratings
pressure among related companies," adds Winsbury.
Moody's does not forecast any material recovery in commodity prices
for the foreseeable future, due to excess supply in a number of
markets.
"On the banking industry, while Australian banks are likely
to report rising problem loans within their resources-related portfolios,
such loans will be manageable, particularly because the four largest
banks exhibit a low direct exposure to the commodities sector,"
says Ilya Serov, a Moody's Senior Vice President for the Financial
Institutions Group.
Moody's analysis is contained in its just-released report
titled "Australia Credit: Subdued Commodities Prices and External
Vulnerabilities Constrain Credit Profiles," and is co-authored
by Diron, Winsbury and Serov.
Moody's report points out that external vulnerabilities remain a
key credit risk for the Australian sovereign and the country's banking
sector, because of their reliance on overseas funding.
And, while high household leverage and property prices do not constitute
immediate concerns, they could amplify the effects of any external
shock.
Moody's report also explains that while construction and building
materials firms, as well as residential mortgage- backed
securities (RMBS) transactions and bank mortgage portfolios have benefitted
from Australia's buoyant housing market, these sectors are
exposed to a slowdown in housing.
The report further points out that states with greater economic diversification
are exhibiting stronger growth.
As for the infrastructure sector, Moody's report says the
stable credit profiles of most infrastructure companies rated by Moody's—despite
challenging credit conditions—reflect their strong market positions,
essential nature, low operating risk and strong liquidity profiles.
On structured finance transactions in particular, Moody's
says the impact of the slowdown in the resources sector has been varied
for both residential mortgage-backed securities (RMBS) and asset
backed securities (ABS).
In relation to RMBS transactions, some early signs of delinquencies
have emerged, given the rise in unemployment in the highly resources-dependent
states of Western Australia and Queensland, but for Moody's-rated
RMBS overall, geographic diversity and improved loan-to-value
ratios due to price appreciation will afford some protection.
By contrast, the downturn in the mining regions will show a more
direct impact on ABS collateral, because ABS transactions are exposed
to loans to small- and medium-sized enterprises and commercial
borrowers, and these borrowers exhibit direct and indirect exposures
to the resources sector.
Nevertheless, ABS deals should prove resilient in the near term,
given that the increased risks flowing from the mining regions are mitigated
by geographic diversity and tightening lending standards.
Subscribers can access the report at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1022830
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Rahul Ghosh
Vice President
Credit Strategy and Standards
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Moody's: Australian economy will stay resilient, but subdued commodities prices are starting to challenge some sectors of the economy and some states