Australia: Risk Assessment


Country Risk Rating

A2 The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.

Business Climate Rating

A1 The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.
Color Palette

Strengths

  • Geographic proximity to emerging Asia
  • Mining resources
  • Moderate public debt
  • Specific geographic features which favor tourism 

Weaknesses

  • Vulnerable to commodity price cycles (particularly iron ore and coal) and Chinese demand
  • Substantial household debt (150% of disposable income)
  • Shortage of skilled labor
  • Highly exposed to natural hazard
  • Wide disparities between federated States

Current Trends

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Economic activity suffers as mining boom ends 

In 2015, growth was held in check by China’s economic slowing and by the worsening terms of trade as a result of the decline in the prices of Australia’s leading export commodities. These two negative effects are again expected to weigh on the level of activity in 2016, although growth will be a little stronger. On the one hand, the slowing in demand for iron ore and coal from China could be offset by the more intensive extraction of other commodities such as copper and liquefied natural gas (by 2020 Australia will be the world’s leading exporter of this gas), maintaining private investment. On the other hand, the Australian central bank (RBA) cut its interest rates twice in 2015. The more expansionary monetary policy will help sustain domestic demand, in particular household consumption, despite the high households’ debt level (150% of gross disposable income). With the current policy interest rate (2%) and the level of inflation close to its target, the RBA could further ease its policy in order to help sustain the economy. Households will also benefit from rising property prices (around 10% in the country, 18% in Sydney) to further increase consumption.

There are, however, a number of downwards risks that could restrict growth: the faster than expected economic slowdown in China (Australia’s leading trading partner), persisting low commodity prices and a fall in property prices. It is worth noting, however, that despite these risks, Australia does retain a certain amount of room for maneuver in boosting activity (low public debt and ability of the central bank to act).

In addition, the signing of the Trans-Pacific Partnership (TPP) agreement in October 2015 will offer an opportunity in terms of growth, employment and exports (one third of Australian exports go to TPP countries). This agreement is going to mainly benefit the agricultural industry and in particular livestock (beef is the leading agricultural export commodity) as well as the dairy industry.

Slowing Chinese economy hits exports 

The budget consolidation sought by the former Prime Minister will no longer be a priority because of the ongoing economic slowdown. The public debt will therefore increase, albeit remain at a low level.

Australia is heavily dependent on demand in China, in particular for iron ore and coal, its two leading exports. The lack of diversity of its customers (for instance, 80% of exported iron ore goes to China) means that Australia is vulnerable to external shocks. The country could benefit from Asian demand to diversify its exports (copper, liquefied natural gas and agricultural products) and from the depreciation of its currency, thus reducing imports. The current account deficit will therefore shrink slightly, even if the balance of transfers and income remains in deficit.

The Australian banking sector is highly developed and well capitalized, but also highly concentrated. The country’s four main banks, sharing very similar business models, hold most the assets (80%) and mortgage loans (90%), thereby creating a systemic risk for the entire sector if there were to be a property crisis.

The new Prime Minister needs to revitalize the economy 

As of September 2015, Malcolm Turnbull is the new Prime Minister of Australia. From the same party (Liberal) as his predecessor, Tony Abbott, Turnbull took advantage of the economic slowdown in the country in the first quarter 2015 and the low popularity of Abbott, deemed to be too conservative, to get himself elected by his party following a motion of censure against Abbott. The main challenge facing Turnbull will be to revitalize the economy ahead of the next round of parliamentary elections which will take place in January 2017. This time-scale could therefore encourage him to increase public spending.

Internationally, Australian policy is focused on establishing closer economic ties with the Asia-Pacific region (in particular China) and diplomatic ties with the United States to counterbalance the rising power of China in the region. Australia has thus joined the Asian Infrastructure Investment Bank set up by China, to the displeasure of the United States. China has also won the contract for the management of the Darwin’s port (in northern Australia and giving access to Asia-Pacific) to the detriment of the United States.

Finally, Australian legislation is positive for business in that the time and cost involved in creating a business are significantly less than in other OECD countries and obtaining credit is easy.

 

Source:

Coface (01/2016)
LOW RISK............ACCEPTABLE RISK............ VERY HIGH RISK

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