Country Risk Rating

A3
Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average. - Source: Coface

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.

Strengths

 

  • Geographic proximity to dynamic Asian economies
  • The attractive quality of life, with immigration contributing to population growth
  • Rich endowment of mineral resources
  • Moderate levels of public debt
  • High tourism potential

 

Weaknesses

 

  • Exposed to commodity price volatility (specifically iron ore, coal, and LNG)
  • Economy remains dependent on Chinese demand
  • Substantial household debt (185% of gross disposable income)
  • Shortage of infrastructure due to the country’s vast territory
  • Exposure to increasing bushfires and droughts
  • Disparity between federated states

 

Current Trends

Recovery with downside risks

Growth is set to rebound gradually in 2021, although persistent downside risks might point to a longer recovery. The lockdown measures and curfews imposed by the government in March and July of 2020 weighed on household consumption (55% of GDP) through a rise in unemployment, which stood at 6.8% in November 2020 after peaking at 7.5% in July. The household savings ratio climbed to 19.8% in Q2 (6.0% in Q1) compared to 5.9% in the same period of 2019. These savings should partly cushion the household debt - already high before the pandemic - that worsened and reached 127% of GDP in Q2, nearly twice of disposable income. Looking ahead, household consumption recovery is therefore likely to remain soft in 2021, considering the high level of debt and the unemployment rate, which are unlikely to be absorbed quickly in the context of moderate growth. Furthermore, international and domestic tourism (10% of GDP before the crisis), hard hit during the pandemic, is unlikely to recover until the second half of 2021, as international borders remain closed. The housing market is set to improve in 2021 due to the increase of home price indexes in Sydney and Brisbane in the second half of 2020, as consumer and business confidence gradually improved. This was driven by interest rate cuts by the Reserve Bank of Australia (RBA) to reach a record low of 0.1%, which reduced mortgage repayment costs. The construction industry (9% of GDP) should also benefit from it. Inflation should slightly increase but remain below pre-COVID-19 levels and the RBA’s target range of 2-3%, as consumption, which would be emerging from the pandemic, is likely to remain sluggish. On the external front, exports (22% of GDP) should remain moderate and under pressure in 2021 due to weak global trade and the ongoing trade war with China, the main trade partner (35% of total Australian exports). That being said, some exports should cushion the blow. Iron ore prices and demand, which are unlikely to be concerned by tariffs, will be driven by China’s recovery in infrastructure and Australia will remain the largest iron ore supplier to China (62% of Chinese iron ore imports were sourced from Australia in 2019). Government spending on infrastructure, which increased and is summarized in the AUD 110 billion rolling infrastructure plan over 10 years, should help to offset some downside risks in 2021.

Record high budget deficit

The government should register a record-high budget deficit in 2020 and 2021 in order to boost consumption and employment, which were wiped out by strict containment measures. For the fiscal year 2021 (July 2020-June 2021), the budget includes measures (8% of GDP) that cover tax relief for low and middle-income classes, and that bolster hiring, especially among the youth. Debt is expected to increase, but external risks should be limited as foreign investors held 53.1% of the debt as of June 2020, and this figure is set to drop further as, in November 2020, the RBA started to purchase Australian Government securities (AGS) on the secondary market under the AUD 100 billion bond purchase program.

The current account surplus, which surged in 2020, should fade away in 2021, dragged down by a decreasing surplus in the balance of goods and services. Goods imports should recover faster than exports, as the easing of containment measures should revive domestic demand. The expected rise in exported commodity prices will not suffice to match the increase in imports, as coal exports will be hurt by an unofficial Chinese embargo. Furthermore, the export of services should drop as well. The intensification of tensions between Australia and China will probably affect services trade with China, which is largely composed of education and tourism: Chinese students account for 27% of total students in 2020 and Chinese visitors usually constitute 16% of visitors to Australia, the largest share. Moreover, the usual secondary income deficit, which fell in 2020 due to the decrease in dividend repatriation by mining companies and interest payments on external debt - mostly private (mining companies, banks, property sector) and denominated in Australian dollars - should increase slightly in 2021. The capital and financial account deficit will remain negative, as foreign direct investment and overseas borrowing feed liabilities, and the negative international investment position reached 40% of GDP, making Australia one of the largest debtors globally.

Political instability on the rise

The center-right Liberal-National coalition led by Scott Morrison, which was elected in the federal election of May 2019 and secured 77 out of 151 seats in the lower house, started its third consecutive term in office until 2022. This should allow Prime Minister Scott Morrison to continue his policy agenda, which focuses on tax cuts and the maintenance of a balanced government budget. However, the administration’s response to the bushfires in 2020 (unwillingly admitting that climate change played a role) combined with the strict restrictions in response to the pandemic fuelled a growing distrust among Australians. On the external front, the relationship with China worsened when Australia called for a global and independent investigation over the pandemic’s origins at the World Health Organization’s annual meeting in May 2020.

Source:

Coface (02/2021)
Australia