Fitch: Australia Policy Uncertainty Rises After Election

(The following statement was released by the rating agency)HONG KONG/SINGAPORE, July 12 (Fitch) The projected narrow victory for Australia's Coalition government in the recent Federal election will make policy implementation more of a challenge from the previous parliament, and raises uncertainty over the medium-term legislative agenda, says Fitch Ratings. The fiscal outlook and the outcome for major Coalition policy proposals could be altered with the government reduced to a slim majority in the House of Representatives - and Senate results still to be finalised. The governing Coalition is projected to lose 14 seats in the election held on 2 July, but will be able to form a government with 76 of 150 seats in the House. In the Senate, preliminary results indicate that the Coalition may have lost seats, which may raise the risks to government policy implementation - including for fiscal consolidation. Prior to the election, saving measures from previous budgets had been stalled when the government was unable to gather sufficient support from cross-benchers or the Opposition to implement legislation.A credible long-term fiscal consolidation strategy remains a key sovereign rating consideration for Australia. Both the Coalition and Labour have expressed support for sound fiscal management, but have disagreed over the policy mix to achieve this objective. The inability to find political agreement has contributed to a slower pace of fiscal repair than projected in previous budgets. It remains to be seen whether the fiscal outlook will be altered by the new balance of power in parliament. For example, proposed changes by the Coalition to superannuation and corporate tax could be altered or blocked, while new measures may be initiated as part of negotiation processes.The lack of a strong electoral mandate could also exacerbate internal politics within the major parties and act as another source of political uncertainty. Australia has had six prime ministers in the past five years, with internal challenges in both major federal parties contributing to the frequent leadership changes. It is notable that the potential domestic political constraints on policymaking come at a time when the economy faces heightened risks. These include potential exogenous shocks from a sharp Chinese slowdown or economic risks from Europe or the US. A shock to the domestic housing market, while not our core scenario, is another potential tail risk. Political constraints could impair the Federal Government from responding effectively and in a timely manner in the event of one of these risk scenarios, which could lead to a sharper downturn than necessary. Australia is also still undergoing a process of economic rebalancing away from commodities and faces structural challenges from an ageing population. Productivity enhancing reforms to boost growth will help to narrow the structural deficit, while failure to enact reforms could worsen the long-term fiscal trajectory. Australia's credit profile remains consistent with its 'AAA' rating, with relatively low public debt and high growth compared with its peers. The sovereign retains some fiscal headroom, with growth expected to be 2.6% and 2.9% in 2016 and 2017, respectively. Its ratings strengths are balanced by a high level of external indebtedness and dependence on commodities and Chinese demand, however. Contacts:Mervyn TangDirectorSovereigns+852 2263 9944Fitch (Hong Kong) Limited19/F Man Yee Building68 Des Voeux Road CentralHong KongJustin PatrieFitch Wire+65 6796 7232Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 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: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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