The report from Moody’s Investors Service forecasts that commodities prices will begin to challenge some sectors of the economy, meanwhile risks related to elevated property prices and the economy’s reliance on overseas funding endure.
Overall, credit fundamentals are expected to stay robust, with moderate gearing in the corporate sector, resilience in the banking sector and bolstering from sound macro-economic trends.
“Australia’s key economic metrics, including GDP growth and unemployment, will continue to outperform most developed economy peers,” says Marie Diron, Moody’s Senior Vice President for the Sovereign Risk Group.
“However, government debt will rise from around 35% of GDP for the fiscal year ended 30 June 2015 to 38% of GDP in the fiscal year ended 30 June 2018, which will limit the government’s room to buffer against potential negative shocks through fiscal easing,” says Diron.
Low commodities prices and weaker corporate and income tax receipts will take their toll on government revenues – contributing to increased government debt. Iron ore and coal producers are coming under particular strain. The firm does not predict “any material” recovery in commodities prices for the foreseeable owing to gluts of overproduction in numerous markets.
Meanwhile, commitments to spending on welfare, education and health will reduce the government’s ability to reduce overall spend.
“On the banking industry, while Australian banks are likely to report rising problem loans within their resources-related portfolios, such loans will be manageable, particularly because the four largest banks exhibit a low direct exposure to the commodities sector,” says Ilya Serov, a Moody’s Senior Vice President for the Financial Institutions Group.
The forecasts come from Moody’s new report: “Australia Credit: Subdued Commodities Prices and External Vulnerabilities Constrain Credit Profiles,” and is co-authored by Marie Diron, Patrick Winsbury and Ilya Serov.
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