Fitch Rtgs: Australia’s Post-Crisis Debt Trajectory Key to Rating Outlook

(The following statement was released by the rating agency) Fitch Ratings-Hong Kong-23 July 2020: Australia has space to accommodate the near-term deterioration in its fiscal metrics associated with the government's efforts to counter the coronavirus pandemic and its effects. However, considerably higher government debt means that rating developments will depend heavily on plans to manage public finances over the medium term, says Fitch Ratings. In the first official budget update since the start of the pandemic, Australia's Treasurer, Josh Frydenberg, revealed the government's budget expectations for the year ending June 2021 (FY21) on 23 July. These showed that the deficit is now expected to reach AUD184.5 billion (around 9.7% of GDP) in FY21, a sharp deterioration from the government's pre-pandemic plans for a surplus of 0.3% of GDP presented in the December 2019 Mid-Year Economic and Fiscal Outlook (MYEFO). It also revised up estimates of the deficit for FY20 to AUD85.8 billion (4.3% of GDP). Since the MYEFO in December 2019, the government has introduced about AUD172 billion (8.5% of GDP) in new spending, covering FY20 and FY21, to offset the effects of the pandemic. Officials also forecast public revenues to weaken on the back of the economic contraction, although buoyant iron ore prices will help to cushion the shock. The latest budget forecasts are broadly in line with the expectations published in our rating decision of May 2020, when we affirmed Australia's ‘AAA' rating and revised the Outlook to Negative, from Stable, to reflect the deterioration in economic growth and public finances from the pandemic. Still, the ‘AAA' rating continues to be underpinned by the country's strong institutions and macroeconomic framework, which have facilitated a robust response to the coronavirus shock. We have revised our economic forecasts since the last rating review, and now expect a 2.7% contraction of in 2020, compared with a previous 5% decline. This is slightly more optimistic than the government's expectation of a 3.75% contraction. Our forecast of 3.1% growth in 2021 is also above the government's 2.5%. However, the recent wave of COVID-19 cases in Victoria, which occurred after the release of our latest forecasts, demonstrates that the trajectory of the pandemic remains uncertain, which poses downside risks to the near-term economic and fiscal outlook. The economic and rating outlook is also sensitive to the ongoing shock to the labour market, which could constrain household consumption and debt-servicing capacity. The targeted six-month extension of the JobKeeper and enhanced JobSeeker schemes, which are designed to support employment and household income, helps to offset these risks in the near term. External shocks, such as adverse shifts in Chinese demand or global prices for key export commodities, could present further downside risks. The government's fiscal response to the pandemic will push Australia's general government gross debt/GDP level to roughly 60% - above the forecast ‘AAA' median of 46% - by end-2021. We will monitor the government's plans for rebuilding fiscal buffers after the pandemic shock through a combination of consolidation and growth-enhancing structural reforms, to assess whether they will be sufficient to put the government debt/GDP ratio on a downward trajectory over the medium term. The temporary and targeted nature of the government's fiscal support and its ongoing commitment to fiscal prudence provide some assurance about the direction of the public finances. However, the debt/GDP ratio has trended upward steadily since 2009, indicating a gradual pace of consolidation following the last fiscal shock. It could be politically challenging to reduce the budget deficit, particularly if the economic recovery is subdued. The full budget for FY21, scheduled to be announced in October, should provide more clarity around the government's medium-term plans for fiscal consolidation, as well as its structural reform agenda. Contact: Jeremy Zook Director, Sovereigns +852 2263 9944 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Duncan Innes-Ker Senior Director, Fitch Wire +852 2263 9993 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@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. 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.