Australia: Risk Assessment

Country Rating1

Rating: A2

Business Climate Rating1

Rating: A1

Risk Assessment2

Growth continues to be sustained, but some concerns are in sight

After the impact of the floods on economic activity in 2011, growth should reach 2.7% in 2012. It is a good performance but signs of a slowdown point to a slightly less buoyant year-end. In fact, businesses in the mining (coal and iron ore) and energy (coal gas and natural gas) sectors should see their exports slow down under the effect of reduced demand from China, the main commercial partner, but also the rest of Asia, which is suffering from the recession in the eurozone. The fall in commodity prices is also putting pressure on the profits of mining groups. In reaction, the latter could therefore postpone several large projects (extension of the Olympic Dam uranium and copper mines, construction of a terminal for exports to Port Hedland, etc.). Investment in the mining sector, one of the traditional growth engines, will nevertheless significantly increase, particularly in the liquefied natural gas sector. For their part, the manufacturing and services sectors (tourism, education) continue to suffer from a competitiveness-price disadvantage due to the high parity of the Australian dollar. Capital flows continue to focus on assets that appear to be the least risky, such as the Australian currency. But both the lowering of the Reserve Bank of Australia (RBA)’s key rate by 25 base points to 3.25% and of the slowdown in the mining sector could limit the appreciation of the local currency.

 

Household confidence on a weakening path

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 RBA’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 –DI-) 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. Prices which are already high should therefore be pushed up further. In this context, tax revenues decelerate, jeopardizing the government's objective to return to a budget surplus in 2013. The reduction in public expenditure would actually further affect growth. Public debt remains at a satisfactory level (30%) despite it has doubled since 2007.

 

Company insolvencies have risen sharply

Since 2002-2003 the Australian economy has been fuelled by the exceptional boom in the mining sector. The latter represents around 9% of the country's GDP and 2% of the workforce. But the slowdown observed since the summer should affect other business sectors that are directly linked to it: construction of factories and extraction sites, the manufacturing industry of specialised mechanical engineering, research and development, exploration, transport, port and railway infrastructures, scientific, financial and insurance services. Other activities benefit from the mining boom, such as distribution. The west region is the most concerned by the deceleration in the sector, but remains at the same time the most dynamic area. Globally, in a context where credit remains depressed, payment delays tend to lengthen. Bankruptcies accelerated in the first quarter of this year (+14% versus the same period of 2011) as reflected in Coface’s payment incidents index, which stands above the world average.

Strengths

  • Geographic proximity to emerging Asia
  •  Mineral resources
  •  Moderate national debt
  •  Solid banking system
  •  Dynamic demographics
  •  Geographic characteristics that favour 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 labour
  •  High exposure to natural hazards

1Country and Business Climate Ratings courtesy of Coface (12/2013)
2Risk Assessment and methodology courtesy of Coface (12/2013).

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