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Fitch affirms Australia's Triple-A

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Australia’s sovereign credit and currency ratings have been re-affirmed as Triple-A by international ratings agency Fitch.

In a statement this morning, Fitch analysts said Australia’s economy rests on strong underlying economic and institutional fundamentals.

“A strongly developed, high-income and flexible economy, supported by a credible policy framework and effective political and social institutions … provides for a high degree of resiliency to shocks,” the agency said.

“Australia’s real GDP growth is high relative to peers.

“The average real GDP growth rate of 2.4 per cent over the past five years, that included the global financial crisis, is double the ‘AAA’ peer rating group median (1.2 per cent).”

In its outlook, Fitch recognised the impact of a mining downturn, but remained confident the economy could push through it.

“Although the end of the mining investment boom that supported growth over the past years has now set in and there are still substantial uncertainties surrounding the outlook, Fitch expects GDP growth to hold up quite well: 2.6 per cent for 2014 and 2.8 per cent for 2015.”

Fitch joined other analysts in its expectation that recent Budget forecasts in the Mid Year Economic and Fiscal Outlook (MYEFO) of December 2013 were conservative.

“The public debt burden is relatively low at 27.6 per cent of GDP.

“This fiscal strength relative to peers is likely to be reinforced by the fiscal consolidation that is expected in the coming years.

“The relatively new central government is in the process of preparing its first federal budget to be presented on 13 May.

“It has not announced any concrete measures yet, but the budget is likely to include significant spending cuts on the basis of recommendations by the National Commission of Audit.

“In the next two years or so, the consolidation may turn out stronger than indicated by the numbers in the Mid-Year Economic and Fiscal Outlook of December 2013.”

Fitch said a rise in housing activity would generate positive economic impacts, but was cautious about the long term trend.

“The Reserve Bank of Australia views the pick-up in the housing market as a welcome substitute for the mining investment boom and central in the transmission of the accommodative monetary policy.

“A sustained housing market boom may, nonetheless, lead to a build-up of vulnerabilities, which could at some stage impact GDP growth and bank balance sheets.

“The banking sector remains resilient. Major banks’ capital holdings are currently rising and their profitability is expected to remain solid through 2014, providing a buffer to absorb a possible asset quality deterioration.

“The system seems well-supervised. Australia is one of only three countries that attract Fitch’s highest banking system indicator (BSI) score of ‘aa’.”

The Triple-A rating outlook is stable with Fitch saying it does not anticipate developments with a high likelihood of leading to a rating change, unless there is a dramatic slowdown in China.

“However, future developments that could individually or collectively, result in a downgrade of the ratings include:

– Deterioration in external balances. Due to Australia’s strong commodity dependence, a sustained and rapid deterioration in the terms of trade, most likely in the context of a severe slowdown in China, could have a strong impact on the current account, as well as on economic growth and public finances.

– Large-scale problems in the banking sector. Such difficulties could result from severe asset quality deterioration – e.g. in the context of a severe slowdown in China – and could lead to a sudden loss of investor confidence, which would negatively impact wholesale refinancing.

– Failing economic rebalancing. The end of the mining investment boom puts pressure on other sectors to support growth through increased productivity and competitiveness. A sustained period of very low real GDP growth and increasing unemployment would negatively impact the public and financial sector balances.”

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