Australia: Risk Assessment

Country Rating¹

Rating: A1

Business Climate Rating¹

Rating: A1

Risk Assessment²

Growth

Sustained growth but weaker performances from the non-mining sectors

After the slowdown in activity in 2011 (1.8%) following the devastating floods in late 2010 and early 2011, growth is expected to accelerate (2.7%) benefiting from a base effect and above all from the rebound of investment. Businesses in the mining (coal and iron ore), and energy (coal gas and natural gas) sectors are actually expected to speed up the realization of big projects in the north of the country, estimated at 451 billion American dollars. Despite the expected slowdown in growth in Asian countries, mining and energy exports will continue to grow strongly. These performances nonetheless hide the difficulties being experienced by the manufacturing and tourism sectors because of the price-competitiveness disadvantages due to the appreciation of the Australian dollar. Downward pressures on the currency which have been observed since the second half of the year as a result of investors turning to the currencies of countries less dependent on raw materials were short-lived. Since the beginning of the year, the local currency has appreciated again. But unless the euro zone crisis intensifies, the dollar is expected to remain at a high level, which, in a context of sustained investment, will favor imports. Foreign trade will therefore continue to contribute negatively to growth and the current account balance will remain in deficit. 

Household confidence weakens

Household consumption continues to be the driving force behind growth but in 2012 it will remain below pre-crisis levels. The trend in the household confidence index is less positive despite the last December cut in the Royal Bank of Australia's key rate to 4.25%. This decision will alleviate the mortgage debt of households, most of which have taken out variable-rate loans. Discretionary spending, especially that linked with leisure, is being cut back as households prefer to pay down debts (150% of their disposable income -IDI-) and to continue to put money into precautionary savings (9.2% of disposable income against 3.1% in 2007). Investment in housing is likely to stagnate or slow slightly, despite the chronic shortage of housing in most major Australian cities. In this context, the prices which are already high should be pushed up further. 

Despite the healthy state of the economy, tax receipts are growing only slightly. But the fiscal deficit will fall (-1.5%) because of the slowdown in spending, while the level of public debt will be very satisfactory (30%).

Company insolvencies have risen sharply

The Australian economy is divided between a very efficient mining sector and manufacturing, agricultural and tourism sectors more sensitive to price-competitiveness. The dynamism and strength of the mining sector attract skilled labor and push wages up to the detriment of other economic sectors which have difficulty in recruiting workers and in maintaining the same level of pay - factors which weaken these businesses and depress their margins. The slowdown in construction could slightly affect civil engineering companies, which will greatly benefit from investments in mining and in port and railway infrastructures. With difficult access to credit, payment delays tend to become longer. Bankruptcies accelerated in the second half of last year (+13.3%) a, as reflected in Coface's payment incidents index, which stands above the world average.

Strengths

• Geographic proximity to emerging Asia
• Mineral resources and large-scale investment plans
• Moderate national debt
• Solid banking system
• Dynamic demographics
• Geographic characteristics that favor tourism

Weaknesses

• Vulnerability to the commodities cycle
• High foreign debt (nearly 100% of GDP)
• High household debt level (over 150% of disposable income)
• Shortage of skilled labor
• High exposure to natural hazards