Deficits as far as the eye can see.
That’s the reality of Australia’s fiscal position in the wake of the collapse of the price of iron ore and the terms of trade.
The impact of all these deficits is that they need to be funded. That means that the Office of Financial Managment (AoFM) issue Australian government bonds to investors which means Australia’s debt position has increased and is increasing.
After last year’s budget one ratings agency, Standard and Poors, said that Australia’s Triple A credit rating is at risk because of its external financing position. They have gone so far as to say that a 30% debt to GDP ratio is a potential trigger point. This led Goldman Sachs economists Tim Toohey and Andrew Boak to write recently that Australia faces the possibility of being downgraded for the first time in 26 years.
Tonight’s Budget papers suggest this is not yet a real risk with Budget Paper number one, saying that,
Net debt is projected to peak at 18.0 per cent of GDP in 2016-17, and fall to 7.1 per cent of GDP by 2025-26. Gross debt is projected to reach $573 billion by 2025-26.
Even if Australia’s Triple A rating does come under review the NAB’s global Forex team says that a downgrade is not such a big deal for Australia, for the Aussie dollar and by implication for the price of Australian bonds and other government debt.
The NAB agrees that “there are valid arguments that the fiscal situation and ratings matter more for Australia than the broader G10. The US has its exorbitant privilege, Japan has domestic buyers, and the rise in demand for AUD from global reserves managers make ratings more important now.”
But they argue that the AAA rating is important as a starting point because there is such a limited number of countries with a AAA and Aaa rating in the G10, Australia, Switzerland, Sweden, Norway and Canada.
That means that with:
a wealth of global reserves (and other conservative investment) to be invested and a limited universe of possible assets: it wouldn’t be possible to park $11.5tn of reserve assets in AAA only investments at present. Investors then must move down the ratings scale. So ratings actions in the G10 universe become even less of an event to note if starting from AAA.
With regards to global FX reserve managers, they too are likely moving down the credit curve as a result of the US (and other G10) downgrades.
In layman’s terms that means that even if Australia’s debt position hits a level, or hints at a level, that will result in a loss of Triple A rating, it might increase borrowing costs a little but it won’t materially impact the Aussie dollar or Australia’s ability to borrow in international markets.
So we don’t really need to worry.
More Budget Coverage:
- AT A GLANCE: All the big items in last night’s 2015 federal budget
- Here are the key budget numbers you’re looking for
- ANALYST: The budget ‘hung the economy out to dry’ and more rate cuts are needed
- This debt chart shows the Abbott government squibbed the tough decisions in the budget
- 31 things you need to know about the federal budget
- Here’s what Australia’s startups think of the stimulus plans in the federal budget
- MYOB’s CEO says the $20K startup gift will be ‘phenomenal’ for Aussies
- All the government programs that have been cut in Australia’s federal budget