Aussie Debt Swells Faster Than Global Demand Amid Resources Rout

  • Foreigners' share of government bonds down to least since 2009
  • Mid-year update from Treasurer Morrison to show revenue drop

However fast the biggest buyers of Australia’s sovereign bonds boost purchases, they aren’t keeping pace with debt issuance as a commodity collapse pulls down government revenue.

Foreign holdings of outstanding Federal debt slid to 63.6 percent in the September quarter, the least since 2009, official data show. That’s even after investors added nearly A$12 billion ($8.8 billion), the most since 2013. The Australian Office of Financial Management will probably increase its A$78 billion borrowing plans for the 12 months ending June 30 after Treasurer Scott Morrison hands down a mid-year economic and fiscal outlook later this month, according to Royal Bank of Canada.

The slowdown in China, Australia’s largest trading partner, and the rout in iron ore, its chief export, looks set to extend the South Pacific nation’s longest stretch of deficits since at least 1970. Morrison needs to borrow more just as investors are weighing their sovereign holdings around the world before the U.S. raises benchmark interest rates for the first time in a decade.

“We’re running at near-record growth in issuance,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “The bottom line is that the budgetary position continues to deteriorate.”

Australia’s 10-year bond yield was at 2.94 percent as of 11:24 a.m. in Sydney on Monday, having climbed 34 basis points since Sept. 30. The premium investors get to hold the debt instead of U.S. notes of similar maturity was 66 basis points, well below the decade average of 152.

Ore Weighs

Prices for iron ore have dropped 44 percent this year to $40.03 a metric ton on Friday and they are down nearly 80 percent since a 2011 high of $191.70. Australia’s dollar has weakened about 10 percent this year and 34 percent from its record high four years ago.

The tumble in the steelmaking material “has largely wiped out the price boom seen last decade,” Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors Ltd., which oversees about $110 billion, wrote in a report. “For Australia, this means an ongoing loss of national income and a further blowout in the budget deficit.”

Each fall of $1 per ton for iron ore knocks $A250 million off annual tax revenue, though the lower Australian dollar may provide some offset, Oliver wrote. 

In May, then-Treasurer Joe Hockey predicted budget shortfalls for the next four years and a deficit of A$35.1 billion in 2015-16. That number will probably be revised up to A$40.3 billion, with spending gaps in the four years through to 2018-19 A$38 billion larger than forecast, Deloitte Access Economics estimated in a report released Nov. 30.

China Slippage

The firm attributes 90 percent of that deterioration to the slowdown in China, which is hurting company profits, equity returns and keeping a lid on Australian wages. The government has also failed to pass spending cuts, adding to the slippage, according to Deloitte Access.

The face value of government securities on issue swelled to a record A$403.3 billion this month from about $55.4 billion on June 30, 2008, AOFM data show. The debt pile is projected to rise to about A$415 billion by June 30, 2016 and reach about A$521 billion by the end of the 2019 fiscal year, based on budget forecasts.

The borrowing surge that began after the global financial crisis met with a wave of demand as managers of central bank reserves and sovereign wealth funds added the Aussie dollar to diversify their holdings. Australia’s role as the highest-yielding AAA debt market also attracted fund managers. Offshore ownership peaked at 76 percent in 2012. 

Since then, buying has been kept in check as the central bank cut interest rates to a record to ameliorate an economic slump, helping drive down the local dollar.

“Demand is still there, there’s no doubt, but it’s definitely not of the magnitude that we have seen in previous years,” said RBC’s Ong. “Going forward, the expectation of somewhat higher global yields led by the U.S. policy normalization cycle starting suggests that capital is already shifting in search of better returns.”

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