HONG KONG/SINGAPORE, December 18 (Fitch) Mid - financial year economic and fiscal
updates show fiscal pressure emerging in Australia but alleviating in New
Zealand, Fitch Ratings says. Divergent trends in the near-term fiscal positions
of the two sovereigns reflect opposing shifts in their underlying economic
fundamentals. Although the full scope of policy reforms and adjustments in
Australia will take shape in the context of next year's budget, its relatively
low public debt burden remains consistent with its 'AAA' rating and Stable
The Australian government's mid-year economic and fiscal outlook (MYEFO) does
not foresee a return to balanced budgets any time soon. It forecasts the federal
government budget deficit current fiscal year at nearly 3% of GDP, against the
authorities' original projection of around 1%. The MYEFO also highlights that
without reforms the federal fiscal balance will struggle to revert to a surplus
even as late as 2023.
The fiscal deterioration does not come as a surprise, as it was signaled by
statements from the authorities. Nor is this a significant setback for our
overall assessment of near-term creditworthiness, although it could put some
pressure on our medium-term view.
Canberra's fiscal consolidation response remains a work in progress. The
government has indicated that it is still committed to a return to surpluses
'that build to at least 1 per cent of GDP by 2023-24'. That is a substantial
deviation from the originally planned return to surplus in 2016-17, although it
is not yet clear whether the government will accelerate consolidation in next
Budget revisions now include more stringent assumptions that reflect the ongoing
economic slowdown driven by a weakened terms of trade. It also includes sluggish
activity in the non-minerals sector and long-term competitiveness challenges to
which structural and policy responses are still evolving.
The recently constituted Commission of Audit is likely to play a crucial role in
the design of this government's medium-term fiscal policies. But much depends on
whether the commission's recommendations raises the productivity of fiscal
expenditure in the years ahead, boosting infrastructure and growth potential
while also enabling a sustained compression of the deficit.
Despite the fiscal deterioration, Australia's general government debt burden is
still forecast to remain well below the 'AAA' peer median of 46% of GDP for the
foreseeable future. It is also considerably lower than the 80%-90% range that is
normally the upper limit compatible with retaining a 'AAA' rating, provided the
debt burden is then placed on a firm downward path and other fundamentals are of
the highest credit quality.
In contrast, New Zealand's own half-year economic and fiscal update indicates
that its prospects have improved significantly. The authorities now project a
small fiscal surplus by 2015, and expect to begin paying down debt from 2016,
barring any significant adverse shocks. We think it will still require an
extensive consolidation effort for New Zealand's general government debt - which
roughly doubled since the global financial crisis - to get back to its 2008
Much of the improvement results from a rise in growth prospects related to New
Zealand's improved dairy-driven terms of trade and the Canterbury rebuild. The
authorities now expect GDP to average 2.6% yoy in the next five years, up
significantly from around 1% in the preceding half-decade. Growth on the basis
of improved terms of trade could remain volatile due to the concentration of
agricultural products in New Zealand's exports.
Despite improving trends in New Zealand's government finances, overheating risks
persist. In particular, strengthening domestic activity could fuel larger
current account deficits and raise gross external debt, which remains higher
than for 'AA' peer medians.
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