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. - 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

  • Proactive economic policy and exchange rate flexibility
  • Geographic proximity to booming economies in Asia
  • 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 and coal)
  • Economy remains dependent on Chinese demand
  • Substantial household debt (185% of gross disposable income)
  • Shortage of infrastructure relative to the country’s vast territory
  • Disparity between federated states

Current Trends

Growth Close to Long-Term Average

Activity is expected to remain stable in 2019, remaining close to Australia’s long-term average of 3%. The decline in mining investment has bottomed out, while the construction of public infrastructure will continue to contribute to growth. This should help to offset the sharp slowdown in real estate investment and housing construction activity, with house prices now clearly falling in most cities. A decline in housing prices was brought about by tougher rules imposed by the Australian Prudential Regulation Authority, a slowdown in immigration, and weaker capital inflows from China. Risks are palpable in the financial sector, as 50% of bank credit is linked to residential property. The increase in domestic consumption is set to be more gradual than expected owing to stagnant wage growth. Household debt levels remain very high, which should further drag on consumption. For this reason, retail trade will continue to perform poorly (highest level of bankruptcies). The sector is also subject to other headwinds, including increased competition from online retailers. In order to mitigate the impact of headwinds to domestic consumption, the Reserve Bank of Australia (RBA) is likely to keep monetary policy accommodative throughout 2019, leading to a wider interest rate differential with the United States and the Australian dollar’s depreciation. This could lead to higher inflation, although the latter is expected to remain below RBA’s target (2-3%). A weaker Australian dollar would boost Australia’s terms of trade. Mineral exports (gas, coal and iron ore) will also benefit from completion of several LNG terminals, and fiscal stimulus in China, Australia’s largest export market. The moderation in domestic consumption and real estate investment will put pressure on imports, leading to a wider trade surplus

Low public deficit and moderate current account deficit  

The authorities are aiming for fiscal equilibrium for the whole Commonwealth, states, and local authorities by 2020/21. Equilibrium is also the aim for the structural balance, i.e. smoothed out for cyclical effects. They expect to achieve this while developing infrastructure, investing in education and training (especially for the indigenous communities) and encouraging SMEs to invest. This should enable the economy to transition from one focused on commodities to one that is diversified, with better labor market participation rates and productivity. Moreover, the government plans to invest USD 30 billion in defense over the next ten years. An increase in commodity prices helped to cushion the widening of the deficit and keep public debt levels moderate, with gross government debt reaching 40% of GDP in 2017.

The current account balance traditionally shows a moderate deficit, which, despite growing diversification, varies primarily in line with the price and demand for commodities, especially Chinese demand. While there was a narrow trade surplus in 2018, the trade in services reflected a deficit. Tourism income and registration fees paid by foreign university students, especially from Asia, do not match spending by Australian economic agents abroad. The income balance is more significant than the trade balance, and is in deficit largely due to dividend repatriation by mining companies and interest payments on external debt, mostly private (mining companies, banks, property sector) and denominated in Australian dollars. The net international investment position equated to -54% of GDP in 2017 according to figures by the IMF, but most liabilities are denominated in Australian dollars.

Political turmoil remains a threat

2018 was a politically volatile year. Former Prime Minister Malcolm Turnbull was defeated during a second leadership spill on August 24, paving the way for Scott Morrison to become leader of the Liberal Party and new Prime Minister. Some factors point toward a continuation of political instability going forward. In particular, Prime Minister Morrison’s stance towards a series of issues surrounding immigration and offshore detention facilities in the Island of Nauru are bound to drive the existing divide within the Liberal Party even wider. If the Wentworth by-election is reflective of broader trends, it is possible that the Liberal Party might lose seats during the next Australian federal elections in 2019, leading to a minority government and further political fragility.

Externally, Australia's policy is to align itself economically more closely with the Asia-Pacific region (especially China) and Europe, with which it has signed trade agreements while maintaining preferential relations with the United States. The authorities are paying greater attention to Chinese investments in the country, given the sectors concerned, as well as to immigration, which is not considered to sufficiently benefit the economy.

.

Source:

Coface (02/2019)
Australia