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Rating Action:

Moody's affirms Australia's Aaa credit rating; maintains stable outlook

14 Jun 2018

Singapore, June 14, 2018 -- Moody's Investors Service ("Moody's") has today affirmed Australia's Aaa long-term issuer and senior unsecured ratings. The outlook remains stable.

The factors supporting the rating affirmation include:

1. Robust and stable GDP growth and strong growth potential relative to peers, denoting very high resilience to economic shocks;

2. A moderate, albeit modestly rising, general government debt burden;

3. Strong institutions that preserve macroeconomic and financial stability, although fragmentation in political representation is a hurdle to more effective fiscal consolidation.

The stable outlook on Australia's rating reflects Moody's expectation that, even in the event of shocks, possibly in the housing market and/or to the economy's access to external financing, the resilience of the economy supported by countercyclical macroeconomic policy would allow Australia's credit metrics to remain consistent with a Aaa rating.

Australia's long-term local and foreign-currency bond and deposit ceilings remain at Aaa. The short-term foreign-currency bond and deposit ceilings remain at Prime-1 (P-1).

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION

ROBUST AND STABLE GROWTH, RELATIVELY HIGH GROWTH POTENTIAL

Australia's relatively high and stable growth are testimony to the economy's capacity to absorb shocks. On two measures, GDP growth and volatility, Australia outperforms many Aaa-rated sovereigns, reflecting a long period of uninterrupted growth since the early 1990s.

Key structural features of the Australian economy include relatively flexible labour and product markets, a well-capitalized and regulated financial system, and a flexible exchange rate. These factors, combined with effective macroeconomic policy, contribute to the economy's swift and significant response to shocks, helping to reduce growth volatility.

High income and wealth levels provide a stable and adjustable tax revenue base for the government and capacity for households to absorb income shocks. At $50,334 in 2017, Australia's per-capita income on a purchasing power parity basis is close to the median of Aaa-rated economies.

In line with other large, high-income economies, Australia's economy is well diversified, with the relatively volatile mining and extraction sector—its largest concentration risk—accounting for 6% of real gross value added in 2017. The share of mining is likely to fall as other sectors of the economy grow more quickly following the stabilization of capacity in the iron ore and oil and gas sectors. The diversification of the economy, in part driven by the floating of the exchange rate in the early 1980s, is a key factor behind the economy's high resilience to external shocks.

Australia's economic features favouring shock absorption, together with projected continued growth in its population, support a relatively high growth potential. Moody's estimates potential growth at around 2.75%, compared to 1.5% and below in parts of Europe or just above 2% in the US.

A MODERATE, ALBEIT RISING, GENERAL GOVERNMENT DEBT BURDEN

Moody's expects Australia's fiscal strength to remain very high, although it is eroding gradually.

Moody's projects general government debt to drift towards 42% of GDP in 2018, from around 41% in 2017. While this marks a further increase from 26.5% five years ago, the government's debt burden will remain broadly in line with the Aaa-rated median level and moderate compared to sovereigns globally.

Moody's debt projections reflect ongoing, repeated commitment to fiscal consolidation by the Commonwealth government. Successive budgets that have aimed to restrain spending and raise revenues demonstrate this commitment, although outcomes have often fallen short of expectations. Robust nominal GDP growth will also help to limit the rise in debt.

In this year's Commonwealth (central government) budget, the objective of a balanced budget was brought forward by one year, to 2020, as windfall revenue gains from higher commodity prices and stronger nominal GDP growth than previously expected will be partly saved. Moody's projects that the general government budget deficit will narrow to 2% of GDP in the fiscal year ending June 2019 (FY2019), from 2.6% in FY2017.

The key risk to the fiscal outlook is that wage growth remains softer than the government forecasts. Moody's expects that wages growth will remain relatively muted and consequently that revenues will be lower than budgeted. Further expenditure restraint will also present a challenge. With the establishment of the AUD1.3 billion National Health and Medical Industry Growth Plan and commitment to fully fund the previously announced National Disability Insurance Scheme, the Commonwealth government's expenditure on social welfare will rise by up to 6% in the next few years in real terms, leaving limited room for nominal spending increases in other areas.

STRONG INSTITUTIONS, ALTHOUGH POLITICAL FRAGMENTATION IS A HURDLE TO MORE EFFECTIVE FISCAL CONSOLIDATION

Australia's institutional framework is very strong. This is reflected in the capacity of its monetary and fiscal policy to deal with shocks, aided by a flexible exchange rate. In addition, an effective macroprudential framework and well-capitalized and regulated financial system support the government's ability to respond to the systemic implications of potential shocks.

The effectiveness of monetary policy is a key aspect of Australia's institutional strength. The Reserve Bank of Australia maintains stable inflation at moderate positive rates. In addition, the central bank has preserved capacity to use conventional monetary policy to offset shocks, should they occur.

Australia ranks particularly highly in the Worldwide Governance Indicators on regulatory quality, which corroborates Moody's assessment of the quality of regulation of the financial sector. For example, in recently responding to rising risks of a potential housing market downturn, the Australian Prudential Regulation Authority (APRA) implemented restrictions on excessive lending to property investors, in order to curb debt-fuelled property demand. APRA also raised bank capital requirements in response to the Financial System Inquiry's (FSI) recommendation to further enhance the strength and resilience of the banking system. Partly as a result, credit growth has eased, most notably in the relatively riskier investor segments of the market.

One particular challenge to Australia's institutional strength relates to fragmentation in political representation at the Commonwealth level which has constrained successive governments' capacity to consolidate the public finances. Moody's expects these constraints to remain and somewhat restrict government effectiveness.

Australia remains subject to two key vulnerabilities that have the potential to test institutional strength. One is high and rising household debt which exposes the economy, and consequently public finances, to any house price downturn. The second is its longstanding dependence on overseas financing which leaves it subject to changes in investor sentiment towards Australian assets. However, Moody's continues to expect that the potential for monetary and fiscal easing, combined with resilience of the financial system related to strong regulation would mitigate the credit impact of such shocks, were they to occur.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on Australia's rating reflects Moody's expectation that, even in the event of housing or external shocks, the resilience of the economy supported by countercyclical macroeconomic policy would keep Australia's credit metrics consistent with a Aaa rating.

The stable outlook also reflects the expectation that, while Australia's fiscal metrics will continue to weaken gradually, the government will retain significant fiscal flexibility to respond to potential negative shocks.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Evidence that the economy's resilience to negative shocks is diminishing would be likely to put downward pressure on the rating -- particularly if it significantly curbed access to or raised the cost of international financing for the government or banks.

Moreover, indications that the hurdles to fiscal consolidation will be higher than we currently expect and last for longer, leading to a faster and more prolonged deterioration in fiscal metrics, would denote weaker institutional strength and would be likely to put downward pressure on the rating.

GDP per capita (PPP basis, US$): $50,334 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.3% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.9% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -2.6% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.4% (2017 Actual) (also known as External Balance)

External debt/GDP: 109.8% (2017 Actual)

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 11 June 2018, a rating committee was called to discuss the rating of the Australia, Government of. The main points raised during the discussion were: The issuer's institutional strength/framework, have materially decreased. Other views raised included: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Martin Petch
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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