Australia Can Delay Surplus Goal Without Jeopardizing AAA Rating, S&P Says
More government borrowing to pay for reconstruction that economists say will cost as much as A$20 billion ($20.2 billion) and delaying the return to surplus by a year won’t affect the top rating, S&P sovereign credit analyst Kyran Curry said today in a phone interview from Melbourne. Australian government bonds were the world’s best performers over the past year.
“The government has a strong enough balance sheet in the first instance to cope with additional spending and it doesn’t immediately affect the rating itself,” Curry said. “If the surplus slips one year, it’s not materially going to impact on the rating, given the balance sheet is in strong shape to wear an additional year of deficits.”
Prime Minister Julia Gillard has promised to cut budget programs to deliver a A$3.1 billion surplus in 2012-13, even as a series of disasters adds billions in emergency spending. She has proposed a A$1.8 billion levy on middle and high-income earners, A$2.8 billion in budget cuts and A$1 billion in delayed spending to rebuild after the floods alone.
Supports RBA View
S&P’s analysis supports the view of Reserve Bank of Australia board member Warwick McKibbin, who last month derided lawmakers’ “fetish” for avoiding budget deficits. McKibbin said borrowing is a “far better strategy” than Gillard’s proposed tax.
Fires in Western Australia in the past three days have destroyed 68 structures including homes and businesses; Tropical Cyclone Yasi tore through sugar- and banana-producing areas last week; and two months of flooding in Queensland have killed 35 people, shut mines and wiped out crops.
“Notwithstanding these additional pressures on the spending side, the fiscal position will return to a stable one over the medium term and that will continue to support the ratings,” Curry said.
The shortfall in the fiscal year ending June 30 will be A$41.5 billion and the deficit will be A$12.3 billion the following year, according to budget forecasts released in November.
“The deficits are relatively small given what’s happening in the U.K. or Japan or some of the other European sovereigns,” Curry said.
The Australian government has A$180 billion of bonds outstanding, part of gross public debt that equates to 22 percent of the economy, the second-smallest among 24 developed markets, according to data compiled by Bloomberg.
The benchmark 10-year bond yield was little changed at 5.74 percent as of 4:16 p.m. in Sydney, from 5.52 percent on Jan. 31.
Australian government bonds maturing in 10 years or more delivered a 22 percent return for investors over the past 12 months, the best performance among developed markets, according to indexes compiled by the European Federation of Financial Analyst Societies and Bloomberg.
The floods may cut 0.5 percentage point from national economic growth in the year ending June 30, Gillard has said. Gillard’s minority Labor government needs to convince independent lawmakers to support the flood levy law after it is introduced in Parliament on Feb. 10.
The opposition Liberal-National coalition won’t back the levy and instead today proposed A$2 billion in savings. The proposal included a deferral of A$448 million in aid for Islamic schools in Indonesia and A$600 million from a plan to divert water away from irrigators in the Murray-Darling Basin.
Treasurer Wayne Swan, in a speech last month, called borrowing to fund reconstruction “the soft option.”
“The right thing to do is to pay-as-we-go for the public reconstruction efforts,” Swan said in the Jan. 28 speech in Brisbane. “Applying some fiscal restraint to other parts of the economy frees up resources to help rebuild after the floods, and reduces pressure on our growing national economy.”
The cost of rebuilding after Yasi will be “considerably higher” than A$2 billion, Stephen Roberts, senior economist at Nomura Australia Ltd., wrote in a Feb. 3 report. Yasi will trim economic growth 0.6 percentage point in the first quarter and mean higher banana, beef and sugar prices, he wrote.
Curry said the main issue affecting the credit rating is the quality of the banking system. The government is due to introduce laws to help customers switch lenders and allow financial providers to issue covered bonds as part of a package to increase banking competition.
“The main thing that is impacting on the rating is the credit quality of the banking system given how high the current account deficit is, that is something we are more focused on,” Curry said. “It remains capitalized and profitable -- it has been responsive to the pressures placed on it in the last few years.”
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