Australia’s Current-Account Conquest Could Save Its Prized AAA
An historic shift in Australia’s current account from perennial vulnerability to source of strength may prove to be just enough
(Bloomberg) --
An historic shift in Australia’s current account from perennial vulnerability to source of strength may prove to be just enough to save the nation’s top credit rating from a budget blowout.
Australia recorded its first current account surplus in 44 years in the second quarter of 2019 and remained in the black for the ensuing two quarters. There are indications it should remain close to balance and could help stave off a downgrade, as S&P Global Ratings acknowledged when it cut Australia’s AAA credit rating outlook to negative this month.
“Lower current-account deficits and less volatility in the terms of trade are actually putting upward pressure on the external assessment,” Anthony Walker, a director at the ratings agency, said in a webinar following the outlook revision. “So there is a potential that this rating will remain AAA even though the government is running continued small deficits.”
S&P’s external assessment incorporates the current account deficit among five key areas to determine a nation’s creditworthiness. The others are institutional, economic, fiscal and monetary assessments.
Capital Importer
Australia has run an external deficit for much of the period since European settlement in 1788 as the share of overseas money attracted to its investment opportunities exceeded the domestic savings pool. The chief concern was that if the flow of capital were to dry up, it would severely damage the economy.
This turned the current account into Australia’s Achilles Heel, consistently hurting the country’s credit assessment and prompting the Treasury to establish an entire unit focused on it.
In 1986, when the balance of payments blew out to almost 6% of gross domestic product, then-Treasurer Paul Keating said it risked condemning Australia to “Banana Republic” status. This part-warning, part-call to arms helped galvanize Australians behind a reform program that would set up the economy’s near three decade expansion.
The current account’s return to surplus last year was a function of surging resource revenues and an upward trend in services exports that strengthened the trade balance.
Reserve Bank of Australia No. 2 Guy Debelle, in a speech last year on the balance of payments, noted it had “undergone a significant transformation” since Keating’s Banana Republic comments. He said Australia’s “external accounts do not constitute a source of vulnerability and have become increasingly resilient over the past 30 years.”
Today, the surplus could prove critical to retaining the AAA rating, which Australia holds with all three rating agencies along with just 10 other nations.
What Bloomberg’s Economists Say
“Australia’s AAA credit rating has traditionally been a balance of a quadruple-A domestic fiscal position, offset by a reliance on external capital -- the current-account deficit. The tables have now turned, Australia’s shift to a current-account surplus position comes just as the fiscal positions deteriorates in response to the coronavirus shock.”
James McIntyre, economist
Commonwealth Bank of Australia forecasts the budget deficit will blow out to A$155 billion ($97 billion), or 8.1% of GDP, in the fiscal year starting July 1, while outstanding government bonds swell to 40% of GDP in the period.
While the improved external position provides some buffer to the AAA rating, the fiscal position “narrowing sharply” from 2022 is the best chance at avoiding a downgrade, S&P said. Still, “risks are firmly pointed toward the downside.”
In a separate research note on unemployment in the Asia-Pacific released Monday, S&P highlighted Australia’s elevated household debt. It expects a flatter recovery Down Under relative to other countries as households prioritize servicing debt over spending.
“In Australia, rising unemployment is almost always associated with a rising household saving rate,” S&P noted.
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