Fitch Ratings: Negligible Rating Impact From Australia Leadership Change

(The following statement was released by the rating agency) Fitch Ratings-Hong Kong/Singapore-August 24: The change in Australia's prime minister is unlikely to have a near-term credit impact for the sovereign, and there is no indication so far that the frequent leadership changes in recent years have undermined economic growth or the trajectory of public finances. Repeated bouts of political turmoil could, nevertheless, eventually weigh on business confidence, policy continuity, and the ability of the government to advance policy proposals that address medium-term challenges. Scott Morrison today became Australia's fifth prime minister since 2010 after winning a Liberal Party leadership vote over Peter Dutton, whose challenge triggered the resignation of the previous incumbent, Malcolm Turnbull. Mr Turnbull himself became prime minister in 2015 through a leadership challenge against Tony Abbott. Political volatility can have a credit impact if it results in tangible spillovers to economic growth, foreign investor confidence or policymaking capabilities. Leadership turnover does not appear to have significantly dampened Australia's economic performance over the last decade, but policymaking has occasionally been affected. The recent political battle, for example, put emphasis on Mr Turnbull's proposed carbon-emission reduction targets, which now look certain to be scrapped, while planned corporate tax cuts were also challenged and dropped. Internal party politics and the government's thin parliamentary majority are likely to remain a challenge at least until next year's election. The economic and fiscal policy agenda is unlikely in Fitch's view to shift significantly under Mr Morrison, who played a key role in the Turnbull government as treasurer. The new leadership is likely to hold to the broad targets outlined in the budget for the fiscal year ending March 2019 (FY19), released in May, and stick to the commitment of achieving an underlying cash surplus by FY21. Fiscal performance improved significantly in FY18 and we forecast further consolidation in the next few years, albeit at a slightly slower pace than the government expects. Australia's general government debt ratio, at 41.2% of GDP in FY17, is the 'AAA' median. The government's ability to achieve an underlying cash surplus by FY21 is highly reliant on macroeconomic outcomes. We expect economic growth to hold up, at 2.8% in 2018 and 2.7% in 2019 and 2020. However, high levels of household debt, a slowing housing market, and reliance on trade with China amid rising global trade tensions pose potential headwinds. Continued political turmoil could hamper the government's ability to implement policies that keep fiscal consolidation on track if economic performance disappoints. A general election for the House and Senate is due by May 2019 and the Labor Party had been tracking ahead of the Liberal Party for 38 consecutive news polls before the leadership change. There is generally cross-party consensus for fiscal consolidation, but the approach to reducing the deficit is likely to differ depending on the outcome of the election, with Labor more likely to balance increased social expenditure by raising taxes on higher income households. Contact: Jeremy Zook Associate Director Sovereigns +852 2263 9944 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Stephen Schwartz Senior Director Sovereigns +852 2263 9938 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234 , Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935 , Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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