Singapore, June 23, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Government
of Australia's long-term issuer and senior unsecured ratings
at Aaa and maintained the stable outlook.
The rating affirmation and stable outlook reflect Moody's expectation
that Australia's economic and institutions and governance strengths
will continue to support the sovereign's resilience in the face
of shocks including the current coronavirus pandemic. The economy's
wealth, diversification and effective labour market, and sound
monetary, financial and fiscal institutions, with track records
of proactive and effective policymaking, reduce the credit impact
of shocks.
The depredations of the coronavirus outbreak on domestic economic activity
and employment combined with a sharply worsening global economy are creating
a severe and extensive credit shock across many sectors, regions
and markets. The combined credit effects of these developments
are unprecedented. For Australia, the shock manifests in
reduced Chinese demand for its exports, exacerbating the effects
of the US-China trade dispute; and in a significant widening
in the fiscal deficits and increase in the government's debt burden.
However, Moody's expects that a long-standing consensus
on prudent management of public finances will continue to prevail,
and as the economy recovers, the sovereign's fiscal strength
will remain broadly resilient.
The long-term local- and foreign-currency bond and
deposit ceilings are all unchanged at Aaa. The short-term
foreign-currency bond and deposit ceilings remain at Prime-1
(P-1).
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
WEALTHY, DIVERSIFIED ECONOMY, ADAPTABLE LABOUR MARKETS AND
FLEXIBLE EXCHANGE RATE CONTINUE TO SUPPORT RESILIENCE TO SHOCKS
Australia's economic strength, the result of a range of structural
factors that support robust growth potential and generally stable growth,
will continue to underpin the sovereign's Aaa rating, notwithstanding
the deep economic shock caused by the coronavirus.
For Australia, the main channels of economic exposure to the shock
emanating from the coronavirus outbreak are the impact of the lockdown
policy response to rising infections earlier this year on consumer spending
and business investment and a sharp slowdown in exports of goods and services,
reflecting a slump in global trade. The ongoing trade dispute between
China and the US exacerbates the global coronavirus shock to Australia's
economy. These factors together will have a severe contractionary
effect, concentrated in the second quarter of 2020. Moody's
expects real GDP to fall by around 5% in 2020, though a proactive
fiscal and monetary stimulus response by the authorities will partly attenuate
the fall in economic activity. While large, the fall in GDP
is smaller than in other advanced economies in general, consistent
with signs that more normal work and spending behaviours are gradually
returning as the epidemic recedes in the country.
In Moody's assessment, the resilience of the Australian economy
supports a return to positive growth next year, without any significant
long-lasting impact on growth potential once the crisis passes.
The economy's shock absorption capacity is supported by its flexibility
in adjusting to shifting economic environments, demonstrated during
previous periods of severe economic stress including the regional shock
of the 1997 Asian Financial Crises and the Global Financial Crisis.
The economy has also shown capacity to adjust to shifting longer-term
trends, and in particular the trend slowing of growth in China,
which has contributed to changes in the role of the resources and services
sectors in Australia.
Australia's medium-term economic challenges include a further
long-term slowing in growth in China, the risk of heightened
geopolitical tensions which may affect trade relationship between the
two nations and lifting productivity growth which has been weak in the
past decade. At this stage, Moody's expects that a
flexible exchange rate will continue to act as an effective buffer,
while diversified goods and services sectors and adaptable labour markets
will continue to support the economy's capacity to adjust and maintain
robust growth potential.
SOUND INSTITUTIONS WITH TRACK RECORDS OF RESPONDING EFFECTIVELY TO SHOCKS,
LIKELY TO PRESERVE FISCAL STRENGTH
A solid institutional framework, including transparent and effective
monetary policy and financial regulation, also underpins Australia's
creditworthiness, lowering the probability and lasting credit impact
of economic and financial shocks.
Political fragmentation at the Commonwealth level in recent years has,
occasionally, impeded the legislative process. However,
Australia's policymaking institutions have consistently demonstrated
high policy effectiveness.
In particular, the Reserve Bank of Australia (RBA) and Australian
Prudential Regulation Authority (APRA) have shown vigilance and responsiveness
to changing economic and financial conditions, contributing to maintaining
financial stability through economic and asset price cycles.
On the fiscal side, Australia has in the past rebuilt the government's
financial buffers by restraining government expenditure during periods
of robust economic growth and commodity prices. A broad consensus
on prudent management of public finances has supported such policy.
As a result, Australia entered the coronavirus pandemic with a relatively
moderate debt burden, providing scope for the government to implement
very large fiscal policy support packages. Reflecting the fall
of economic activity and the recent substantial easing of fiscal policy,
Moody's forecasts Australia's general government debt burden
to rise significantly, to above 50% of GDP in the fiscal
year ending June 2021 (fiscal 2021) from 41.8% in fiscal
2019, with further modest increases in the following years.
While such a debt burden would be Australia's highest in several
decades, it would also remain consistent with other Aaa-rated
sovereigns, most of which are facing a similar sudden debt shock.
Compared to other advanced economies, the initial jump in the debt
burden is likely to be less large for Australia due to a somewhat less
acute fall in growth.
Moreover, while Australia's economy is reliant on external
financing implying some sensitivity to international investors'
sentiment, Moody's expects the government's debt affordability
to remain strong. Strong institutions are likely to continue to
support stable demand for government assets including, as has been
the case in the past, from foreign central banks.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that downside risks
to the credit profile are contained by the underlying resilience of the
economy and Australia's effective policy-making institutions.
Australia's exposure to externally driven shocks, reflecting
its exposure to global trade, particularly with China and reliance
on external financing, is material and particularly relevant in
the context of the coronavirus shock.
However, Australia's structural economic strengths,
fiscal flexibility and track record of stability-preserving monetary
policy and financial regulation support the view that the economy and
policymakers will effectively respond to a changing environment while
preserving the sovereign's creditworthiness. In particular,
while a slower economic recovery than Moody's currently expects
could lead to a higher debt burden for longer, conversely,
periods of more robust growth are likely to lead to faster fiscal consolidation
consistent with previous such episodes.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are not material to Australia's credit profile
at this stage. Much of the country experiences frequent periods
of drought, affecting the livelihood of rural populations in those
areas and prompting financial support from the government. Drought
conditions also exacerbate the country's summer bushfires. As seen
in the summer of 2019-20, these can grow out of control,
causing human casualties and material damage, and enveloping some
of the country's largest cities in smoke, damaging the health and
productivity of the population. Australia currently has the resources
to address these issues without impacting its economic or fiscal strength.
However, over time more frequent and severe natural disasters,
faster depletion of water resources and/or soil degradation could negatively
affect the sovereign's credit profile.
Social considerations are not material to Australia's credit profile.
With a relatively young, growing population sustained by high levels
of immigration, Australia's demographics are strong compared with
many other rated sovereigns. Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, given the substantial
implications for public health and safety. As explained,
for Australia, the shock mainly materializes as an economic and
fiscal shock. Australia's strong health care system and proactive
public health warnings and activity restrictions mitigate social risks
to its credit profile stemming from the coronavirus outbreak.
Governance considerations are material to Australia's credit profile.
Its very high scores on measures of institutional strength, as captured
by the Worldwide Governance Indicators, reflect the country's long
history of robust governance.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
As implied by the stable outlook, a negative rating action is unlikely
in the near term.
Evidence that the effectiveness of the country's policymaking institutions
was diminishing would likely put downward pressure on the rating.
In particular, a sustained and marked deterioration in fiscal and
debt metrics not compensated for during periods of robust economic growth
would weigh on the rating.
Relatedly, evidence that access to international financing for the
government or banks was becoming less stable and more costly could put
downward pressure on the rating.
GDP per capita (PPP basis, US$): 53,379 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.8% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.8%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -1.0%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.6% (2019 Actual) (also
known as External Balance)
External debt/GDP: 111.3% (2019 Actual)
Economic resiliency: aa1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 18 June 2020, a rating committee was called to discuss the rating
of Australia, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially decreased. The issuer's
institutions and governance strength, have materially increased.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions in the disclosure form. Moody's Rating Symbols and
Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for
Designating and Assigning Unsolicited Credit Ratings available on its
website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social and
governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed by
Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main
60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's office
that issued the credit rating is available on www.moodys.com.
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 / Sub Sovereign
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
