Risks to Australia’s Sovereign Credit Rating Include China Slowdown, Commodity Price Fall

Australia is set to see its gross public debt ratio peak in 2018 and the fiscal surplus to come into balance by 2021, reinforcing Fitch Ratings improving outlook for the sovereign and its 'AAA'/Stable rating.

Still, Fitch analysts expect Australia’s deficit to shrink at a slower pace than forecast in the Mid-Year Economic and Fiscal Outlook, mostly thanks to their subdued forecasts for real GDP growth and commodity prices. “The economy should be supported by buoyant employment growth, the fading drag from mining investment and improved non-mining investment prospects,” analysts said.

“However, weak wage growth will weigh on household consumption, while slowing growth in China is likely to constrain commodity price rises and Australia's export growth.”

The government has downgraded its growth forecast for fiscal 2018 to 2.50% from 2.75%, while it expects growth to rise again in fiscal 2019 to 3% and remain at that level until fiscal 2022.

The nation’s economy and fiscal performance face risks from negative global economic developments, especially a slowdown in China or a drop in commodity prices, Fitch said. “Risks might also stem from a faster-than-expected rise in U.S. interest rates, which could lift borrowing costs and pressure domestic liquidity conditions, given the banking system's reliance on international wholesale funding. High household debt levels could make the economy especially sensitive to rising rates,” analysts said.

Australia’s buffer against economic shocks has deteriorated over the last decade, while debt ratios have grown—in 2007, the government’s gross debt was less than 10% of GDP, while it’s likely to reach 42% next year, Fitch said.

– Nicholas Stern, managing editor

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