Mission Possible for New Aussie Treasurer as Iron Ore Bottoming

  • Respite seen as iron ore stabilizes, Aussie depreciates
  • Signs of improvement in non-mining sectors of economy
Scott Morrison, Australia's treasurer.
Scott Morrison, Australia's treasurer.
Photographer: Mark Graham/Bloomberg

Australia may have finally stemmed the bleeding in its budget just as new Treasurer Scott Morrison takes over after Joe Hockey was dumped.

The Aussie dollar’s slide and the stabilization of iron ore, the nation’s biggest export, could spell relief from the revenue misses that have driven deficits since 2008. While Treasury doesn’t forecast a surplus until at least 2020, growth in government receipts will probably accelerate under Morrison as the economy adjust to the slowdown in mining and other industries are “clearly improving,” said National Australia Bank Ltd.’s Peter Jolly.

The new budget boss faces the task of helping to support growth that’s slowed to just 2 percent year-on-year while maintaining the path back to surplus that has been touted as a hallmark of economic competence by Australian governments. And though he may gain some respite from commodities, the economy remains exposed to risks from sagging Chinese growth and the turmoil that monetary tightening in the U.S. may spark in global markets.

Challenging Brief

“The fiscal settings will remain challenging, but we are now at the point where the bulk of the slowdown from the mining sector is fairly advanced,” said Jolly, NAB’s Sydney-based head of market research. “On our current forecasts, the new Treasurer can expect tax revenues growing at a better pace than Joe Hockey has had.”

The following charts illustrate some of the drivers of the budgetary and economic situation that Morrison faces as he guides future taxation and spending plans.

CHART 1: The price of iron ore has rebounded 29 percent to $57.30 since touching a decade low of $44.59 a ton in July, while this year’s 13 percent depreciation of the Australian dollar to 71.40 U.S. cents as of 12 p.m. on Tuesday in Sydney means prices are higher in local currency terms. The government’s most recent budget assumed an iron ore price of $48 and the currency at about 77 cents.

CHART 2: Some of the negatives that contributed to weak
government revenues “will start to be less of a drag,” said NAB’s Jolly. The chart shows that, while wages growth is muted, the economy has added 22,300 jobs on average over the past six months and the price of iron ore in Australian dollar terms has climbed from its July low.

CHART 3: While Australia’s debt pile has continued to grow, the government has been able to fund its ongoing deficits without major difficulty. Investors remain attracted to bonds that offer higher yields than most of Australia’s top-ranking peers, even as the global debt rally and unprecedented easing have pushed down interest rates.

CHART 4: Even as yields are high by global standards, the levels the sovereign is paying to borrow have dropped to unprecedented lows, while  investor demand at government auctions has held steady.

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