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BFCSA: Moody’s warns Australian public debt will keep rising

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Moody’s warns Australian public debt will keep rising

MacroBusiness 12:10 am on April 1, 2019


David Llewellyn-Smith


Yes it will:


The credit profile of Australia (Aaa stable) reflects its very high economic strength, buttressed by its robust growth potential and demonstrated flexibility in adjusting to a shifting economic environment. The latter has been reflected in the economy’s ongoing adjustments to changes in the role of the resources sector in providing growth impetus. A solid institutional framework, including transparent and effective monetary policy and financial regulation, also underpins Australia’s creditworthiness, lowering the probability and likely impact of potential economic and financial shocks.

Australia’s relatively moderate debt burden also supports credit quality, despite fiscal consolidation challenges. Recent periods of lower nominal GDP growth compared with the commodity boom years have constrained revenue increases, although solid gains in employment and higher-than-expected commodity prices have been supportive. A more fragmented political setting has also contributed to difficulties in achieving specific fiscal measures and reform more generally. A federal election, due by May 2019, is likely to shape fiscal and broader policy directions.

Reflecting these forces, we forecast the general government debt burden to rise above 43% of GDP in the fiscal year ending 30 June 2020 (fiscal 2020), from 36.1% in fiscal 2015. Nevertheless, Australia’s debt burden will remain moderate compared with other Aaa-rated sovereigns.

Australia continues to be exposed to two main types of shocks. High and rising household debt exposes the sovereign to any downturn in the housing market through its dampening effect on consumer spending and GDP growth. Moreover, the economy’s longstanding dependence on external financing exposes it and the financial system to any shift in foreign investors’ assessment of the attractiveness of Australian assets.

Nevertheless, scope for monetary or fiscal policy easing, combined with strong institutions and a well-capitalized banking sector, would mitigate the negative economic and fiscal impact of either shock. The stable outlook on Australia’s rating reflects our expectation that, the credit profile and related metrics will remain consistent with an Aaa rating, even in the event of housing or external financing shocks.

That seems about right barring an outright house price crash, which is a high risk given monetary policy is all but exhausted. The basic issue is that as the private sector develerages, and we run an external deficit, the sectoral balances of GDP mean public debt must rise or the economy will shrink.

The only thing that can change this is monetisation of public debt via helicopter drops or MMT.

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