Fitch Rtgs: Australia to Prioritise Growth Over Near-Term Fiscal Consolidation

(The following statement was released by the rating agency) Fitch Ratings-Hong Kong-08 October 2020: The wider fiscal deficit projections contained in Australia's 6 October budget highlight the federal government's shift to a more active use of fiscal policy over the next several years to facilitate an economic recovery from the ongoing coronavirus shock, says Fitch Ratings. In our view, Australia came into the coronavirus shock with fiscal space to counter the near-term effects of the crisis. We affirmed the country's ‘AAA' rating in May, but revised the Outlook to Negative to reflect the impact of the pandemic shock on the economy and public finances. Australia's rating is underpinned by the country's strong institutions and macroeconomic framework, which have contributed to its robust response to the crisis. Given the higher debt levels resulting from near-term stimulus, the medium-term debt trajectory will be a key factor in our future assessments of the country's rating. We will also consider Australia's fiscal position in the context of the deterioration of public finances occurring among most rating peers as a result of the pandemic shock. Consistent with Fitch's sovereign rating criteria, our fiscal projections are made on a general government gross debt basis, which consolidates state and local government fiscal balances. As such, ongoing support measures at the state level will also feed into our assessment of the sovereign rating. The budget forecasts slightly wider deficits over the next couple years than we previously anticipated, and correspondingly higher public debt levels. Nonetheless, the longer-term gross debt trajectory is broadly in line with our expectations, which project a stabilisation of the ratio beyond June 2023. Net debt is forecast to decline after the fiscal year ending June 2024 (FY24), according to the budget. In the budget, the government brought forward the second phase of its previously enacted tax cuts to the beginning of the current fiscal year. Originally, these were to be implemented at the beginning FY22. It also announced a number of other tax relief measures for businesses, an additional AUD10 billion in infrastructure spending and other allocations to support employment. The fiscal loosening announced in the budget, and the more gradual subsequent pace of fiscal consolidation, will provide support to the economy and help to moderate the impact of the tapering of government relief under programmes such as JobKeeper, which is scheduled to end in 1Q21. Many of the government's immediate fiscal measures, including JobKeeper, were designed to be temporary and targeted in nature, which still leads to significant fiscal consolidation after the current budget year. Fitch is slightly more optimistic than the authorities about the prospects for the job market. We expect the unemployment rate to fall below 6% in FY22, compared with the government's projection that this will only occur in FY23. The difference is significant, as the Treasurer, Josh Frydenberg, has provided guidance that fiscal policy will prioritise job growth over fiscal consolidation until the unemployment rate is comfortably below 6% and on a downward trajectory. The government's emphasis on using fiscal support to lower unemployment, as well as more generally its intent to use fiscal policy to bolster growth, highlights risks that remain to the public debt trajectory. An intensification of economic disruption associated with the pandemic, or a slower-than-expected decline in unemployment could push public debt levels above the budget's projections over the medium term. External shocks, such as adverse shifts in Chinese demand or global prices for key export commodities, could present further downside risks Contact: Jeremy Zook 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 Duncan Innes-Ker Senior Director, Fitch Wire +852 2263 9993 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.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. 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