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.|
Transition of the economic model to deal with the end of the mining boom and the Chinese economic slowdown
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. Growth would be a little stronger in 2016. The country started to adapt its economic model. 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. Service sector (especially education and tourism) is simultaneously strongly expanding. The more expansionary monetary policy by the Australian central bank (RBA) will help sustain domestic demand, in particular household consumption, despite the high households’ debt level (185% of gross disposable income, 90% of it comes from mortgage debt). Households will also benefit from rising property prices (around +7% year-over-year in July 2016, +9% in Sydney) to further increase consumption.
However, two downside risks could hamper growth: (i) the faster than expected economic slowdown in China (Australia’s leading trading partner, one third of exports) and (ii) failing house prices. Nonetheless Australia retains a certain amount of room for maneuver in boosting activity if necessary thanks to its low public debt and the capacity of the RBA to react with an interest rate currently at 1.5%.
The abandonment of the public deficit target leads to a rapid increase in public debt
The budget consolidation sought by the former Prime Minister is no longer a priority. Indeed Prime Minister Turnbull wants to adopt a pro-corporate policy by both lowering taxes and allocating $1.1 billion (0.1% of GDP) in innovation and entrepreneurship. Otherwise, security issues have been very present in the last general elections’ debate. Thus, the government plans to invest $30 billion over the ten next years in the defense sector. Public debt should therefore continue to rise, but should remain at a low level.
Australia is heavily dependent on demand in China, in particular for iron ore and coal, its two leading exports, despite the initiation of its model’s transition. This transition could benefit from Asian demand to diversify its exports (copper, liquefied natural gas and agricultural products). Nonetheless customer diversification remains weak (for instance, 80% of exported iron ore goes to China). Current account deficit should slightly narrow thanks to the increase in exports and to income balance improvement.
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.
Re-elected, Malcolm Turnbull will govern with the smallest majority
Following a motion of censure against former Prime Minister Tony Abbott, current PM Turnbull called for anticipated general elections in July 2016 in order to obtain a wider majority to govern. Despite his re-election, he gets a reduced majority as the government coalition (Liberal – National) lost 15 seats compared to the previous mandatory (76 seats obtained in the 150-seat House of Representatives). Political instability, prevailing since 2010 (five Prime ministers in six years), should continue. New anticipated elections before the end of Turnbull’s mandate in 2019 are not excluded if he’s willing to get a wider majority or if the most conservative wing of its Party (Abbott’s support) sees an opportunity to pass a motion of censure against Turnbull.
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 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.