Australian economy will stay constant, but subdued commodities prices are starting to challenge some sectors of the economy and some states

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Australian Economy News

According to the Australian economy, Moody’s Investors Service says that credit fundamentals in Australia (Aaa stable) remain robust, with moderate gearing in the corporate sector, a resilient banking sector, and sound macroeconomic trends all providing support.

However, subdued commodities prices are beginning to challenge some sectors of the economy and some states. Moreover, risks related to elevated property prices and Australia’s dependence on external financing remain.

“Metrics to measure Australian economy —including GDP growth and unemployment—will continue to outperform most developed economy peers,” says Marie Diron, a Moody’s Senior Vice President for the Sovereign Risk Group.

australia economy

“However, government debt will rise from around 35% of GDP for the fiscal year ended 30 June 2015 to 38% of GDP in the fiscal year ended 30 June 2018 (Australian economy), which will limit the government’s room to buffer against potential negative shocks through fiscal easing,” adds Diron.

Moody’s explains that government debt will increase further. First, subdued commodities prices will continue to weigh indirectly on government revenues through weaker corporate and income tax receipts. Second, broad-ranging measures to raise revenues are no longer being considered while possibilities to restrain spending will be limited by commitments on welfare, education and health expenditure.

“As for the pressure on resources-oriented sectors, such pressure is unlikely to let up,” says Patrick Winsbury, a Moody’s Associate Managing Director for the Corporate Finance Group.

“Iron ore and coal producers and resource-oriented states are coming under particular strain, resulting in some downward ratings pressure among related companies,” adds Winsbury.

Moody’s does not forecast any material recovery in commodity prices for the foreseeable future, due to excess supply in a number of markets.

“On the banking industry, while Australian banks are likely to report rising problem loans within their resources-related portfolios, such loans will be manageable, particularly because the four largest banks exhibit a low direct exposure to the commodities sector,” says Ilya Serov, a Moody’s Senior Vice President for the Financial Institutions Group.

Moody’s analysis is contained in its just-released report titled “Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles,” and is co-authored by Diron, Winsbury and Serov.

Moody’s report points out that external vulnerabilities remain a key credit risk for the Australian sovereign and the country’s banking sector, because of their reliance on overseas funding.

And, while high household leverage and property prices do not constitute immediate concerns, they could amplify the effects of any external shock.

Moody’s report also explains that while construction and building materials firms, as well as residential mortgage- backed securities (RMBS) transactions and bank mortgage portfolios have benefitted from Australia’s buoyant housing market, these sectors are exposed to a slowdown in housing.

The report further points out that states with greater economic diversification are exhibiting stronger growth.

As for the infrastructure sector, Moody’s report says the stable credit profiles of most infrastructure companies rated by Moody’s—despite challenging credit conditions—reflect their strong market positions, essential nature, low operating risk and strong liquidity profiles.

On structured finance transactions in particular, Moody’s says the impact of the slowdown in the resources sector has been varied for both residential mortgage-backed securities (RMBS) and asset backed securities (ABS).

In relation to RMBS transactions, some early signs of delinquencies have emerged, given the rise in unemployment in the highly resources-dependent states of Western Australia and Queensland, but for Moody’s-rated RMBS overall, geographic diversity and improved loan-to-value ratios due to price appreciation will afford some protection.

By contrast, the downturn in the mining regions will show a more direct impact on ABS collateral, because ABS transactions are exposed to loans to small- and medium-sized enterprises and commercial borrowers, and these borrowers exhibit direct and indirect exposures to the resources sector.

Nevertheless, ABS deals should prove resilient in the near term, given that the increased risks flowing from the mining regions are mitigated by geographic diversity and tightening lending standards.

The author of this article: forexfactory.com

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