Singapore, June 28, 2022 -- 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.
Moody's expects that Australia's wealthy and resilient economy will continue to grow solidly in the medium term, as it continues its recovery from the impact of the Covid pandemic. Australia's economy has again demonstrated its marked resilience, on this occasion to a shock with atypical and unpredictable effects. Effective deployment of monetary, financial and fiscal policy tools to limit the short-term credit effects of the pandemic illustrate the strengths of Australia's proactive and flexible monetary, financial regulatory and fiscal institutions. As the recovery continues and inflation pressures, particularly from external factors, have risen, Moody's expects that Australia's authorities will continue to tighten monetary policy to reduce inflation and support sustained economic growth. At the same time, the strong fiscal expansion deployed to limit the pandemic's impact on economic activity and employment, and ramp-up infrastructure investment, will cause continued deterioration of the fiscal metrics. Moody's expects fiscal repair will be gradual in the medium term.
The local- and foreign-currency country ceilings are all unchanged at Aaa. The local currency ceiling at Aaa reflects Australia's relatively modest government footprint in the economy, predictable, reliable and effective institutions and limited political risks. Its external vulnerability on foreign financing for domestic investment is partially offset by the relatively high proportion of the country's liabilities that are denominated in Australian dollars. The foreign currency ceiling at Aaa reflects high degrees of policy effectiveness, a highly open capital account and an effective long-lived exchange rate regime.
RATIONALE FOR THE AFFIRMATION OF THE Aaa RATING
AUSTRALIA'S LARGE, FLEXIBLE AND DIVERSE ECONOMY WILL CONTINUE TO RECOVER FROM THE COVID SHOCK
Australia's economy continues to demonstrate resilience, underpinned by its scale, diversity and high incomes, as well as its highly flexible labour, product and capital markets, well-regulated financial system and floating exchange rate. These features enabled the economy to rebound quickly in the wake of the Covid pandemic, while proactive and effective monetary and fiscal policy support limited the impact on employment.
Sectoral diversity, including within the resources sector, will support resilience as the world economy slows in response to tighter monetary policy and slowing growth in China. In addition to solid global commodity prices, the broad diversity of Australia's economy, including internationally competitive agricultural and service industries, a highly developed domestic market, and wealthy consumer base, will continue to support economic strength.
Since the ending of major Covid related restrictions on the economy, headline inflation has risen sharply above the Reserve Bank of Australia's (RBA) target range of 2-3%, driven by a substantial lift in tradables inflation. Tradables inflation is currently well above its long-term average while non-tradables prices are modestly above the long-term average, illustrating the impact of global supply chain pressures and sharply higher food and energy prices as a result of the Russia-Ukraine conflict. At this point, domestic price pressures, including wages growth, have broadened across sectors putting moderate upwards pressure on the overall inflation rate. Moody's expects a significant increase in RBA interest rates, leading to a moderation of inflationary pressures over 2023.
Moody's expects that Australia's economy will grow at 3.2% in 2022, reflecting solid consumer demand growth as households draw down savings built up during the pandemic and the employment outlook remains positive. While household debt remains high, the impact of higher interest rates on consumer demand should be moderate given that a significant proportion of mortgage holders are well ahead with their payments and consequently have the ability to smooth spending over periods of higher rates. Adding to growth, freer movement should allow the resumption of higher levels of migration and inbound tourism. Commodity prices are expected to remain elevated supporting nominal incomes growth. In 2023, GDP growth will moderate to 2.6% as tighter monetary policy leads to a modest slowing of consumer demand.
Important long-term challenges to Australia's economic strength remain. Relatively poor and declining productivity performance, which in part parallels international patterns and partly reflects only modest business investment levels may reduce Australia's long-term growth potential, erode competitiveness and living standards and hinder the economy's resilience to shocks. Over time, and in a context of spending pressures related to policy programs such as the National Disability Insurance Scheme, aged care, defence and the program of infrastructure building, this would also lead to an erosion of Australia's fiscal metrics. Australia's capacity to respond to shocks would be diminished.
Positively, there are early signs that productivity enhancing reforms that focus on lifting women's participation in the workforce through support for childcare and gender pay equity, a large-scale infrastructure program focused on improving transport systems, support for innovation and the response to climate change, are part of the policy program for the next number of years.
Tensions with China remain as Australia's key geo-political risk, and the new Labor government is unlikely to significantly change the previous government's fundamental approach to the issues which have raised tensions. At the same time, recent fractiousness in the relationship has not led to significant broad based economic impacts. Over the longer-term however, these tensions raise the risk of some erosion of Australia's key economic strengths, particularly in relation to commodity and services trade with China.
Combining these factors, Moody's expects real GDP growth to average around 2.5% in the medium term, contributing to preserving Australia's economic strength at high levels.
FISCAL METRICS WILL WEAKEN FURTHER, THOUGH GRADUAL REPAIR WILL RESTORE CAPACITY TO RESPOND TO FUTURE SHOCKS
As the bulk of the pandemic impact fell in fiscal 2021, general government debt burden rose to 59% of GDP in 2021, from 42% in 2019. By 2024, Moody's expects Australia's debt burden will drift to around 67% of GDP in part reflecting Federal and state infrastructure spending and structural increases in spending associated with long-term issues including spending on the National Disability and Insurance Scheme (NDIS), aged care, defence, and health. Australia's debt affordability will remain high, despite the increase in the debt burden over the period since 2019, the interest burden is expected to be just 3.3% of revenue in 2024 as policy rates rise before easing as inflationary pressures wane, raising the average cost of debt modestly.
Moody's expects Australia's debt burden to rise, although fiscal consolidation will proceed gradually. In the short term, the fiscal balance deficits will be narrower than forecast in the recent Pre-Election Fiscal and Economic Outlook (PEFO), due to robust nominal GDP growth, further employment growth, and higher than earlier forecast commodity prices. The program spending settings proposed by the new government for the next four years which includes childcare aimed at productivity-enhancing increases in female workforce participation, education and training to support workforce skills acquisition and energy related investment, are not substantially different from the planned spending by the previous government; the government has also outlined plans to offset this spending with savings in part generated through a review of the infrastructure program and broader existing spending plans.
The strength of Australia's economic growth will be a major driver of fiscal metrics over the long-term. Boosting productivity growth is a key element of this and Australia's productivity performance has been relatively weak over recent years. The assumption underpinning the Treasury's assessment of the long-term fiscal outlook is productivity growth of 1.5% per year the 30-year average ; this compares with growth of around 1.2% over the past ten years and lower more recently. While a modest shortfall would have a moderate impact on fiscal strength, the inability to lift recent rates of productivity towards the 10-year average would likely raise Australia's debt burden significantly higher than currently expected, for longer, with negative implications for debt affordability and fiscal strength.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's view 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 Chinese demand for Australian exports, and reliance on external financing are significant and particularly relevant in the context of emerging risks related to the impact of higher global and domestic inflation and the associated monetary policy response. Australia is also exposed to the short-term challenges affecting China's economy. Geopolitical tensions may further affect the trade relationship between the two nations and are an ongoing risk, though following the election of a new Labor government there have been tentative signs of willingness to re-engage.
Social considerations also support stability in the credit profile. Relatively favourable demographic trends, together with very strong provision of education, healthcare and other basic services support growth potential and limit domestic political tensions. Conversely, Australia is negatively exposed to climate risks, both physical climate change and carbon transition. The former mainly reflects an apparent step up in the frequency of bushfire and flooding events, which generally have their major economic impacts on the tourism and mining sectors but have significant broader remediation and long-term mitigation costs. The latter relates to the importance of energy exports, including coal and gas, in Australia's export mix.
Notwithstanding these risks, Australia's flexible labour and goods markets, floating exchange rate and high institutions and governance strength combined with demonstrated monetary and fiscal policy effectiveness provide strong buffers to maintain economic and financial stability with limited long-term damage to the economic and fiscal strengths consistent with a Aaa rating.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Australia's environmental issuer profile score of Moderately Negative (E-3), reflects exposure to both physical climate risk and carbon transition. Climate-change related natural disasters in particular water stress and bushfires can cause material disruptions. Moreover, with hydrocarbons accounting for around 18% of exports, the economy and public finances are somewhat exposed to a global shift away from coal as a source of energy. Australia's very strong governance and a robust government balance sheet mitigate the sovereign's susceptibility to these risks.
Australia's Positive social issuer profile score (S-1) is among the few sovereigns for which social attributes support the rating, in particular reflecting access to high quality education, housing, healthcare and basic services. Strong population growth has also supported the economy and public finances in the past.
Australia's very strong institutional structure and policy credibility and effectiveness support its credit profile, captured by a Positive governance issuer profile score (G-1).
Australia's neutral-to-low (CIS-2) ESG credit impact score reflects moderate exposure to environmental risk, mitigated by very strong governance and a robust government balance sheet that mitigates the sovereign's susceptibility to these risks. Social attributes are credit positive.
GDP per capita (PPP basis, US$): 56,403 (2021 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.7% (2021 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.5% (2021 Actual)
Gen. Gov. Financial Balance/GDP: -9.4% (2021 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 3.4% (2021 Actual) (also known as External Balance)
External debt/GDP: 98.8% (2021 Actual)
Economic resiliency: aa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 23 June 2022, 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 economic fundamentals, including its economic strength, have materially decreased. The issuer's institutions and governance strength has not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Australia's rating is Aaa, which is already at the top of our rating scale. An upgrade to a higher rating is therefore not possible.
As implied by the stable outlook, a negative rating action is unlikely in the near term.
Evidence that the economy's resilience to negative shocks was diminishing would 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. A sustained and prolonged deterioration in fiscal metrics following policy responses to shocks to the economy would be likely to weigh on the rating.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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.
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 on https://ratings.moodys.com/rating-definitions.
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VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
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MD - Sovereign Risk
Sovereign Risk Group
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Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077