Moody's: Australia's very high economic strength supports Aaa rating, despite exposure to housing and external financing shocks

Moody's Investors Service says that Australia's Aaa rating is supported by the country's very high economic strength, in particular, its sustained GDP growth at robust levels, even as the economy is adjusting to lower commodity prices that have dampened a significant source of revenues and incentives to invest in the country. 

A very strong institutional framework also underpins Australia's rating. 

According to Moody's, Australia's monetary policy and banking regulations would most likely respond effectively to the potential economic and financial stability risks faced by the country. 

Moody's conclusions were contained in its just-released report titled "Government of Australia — Aaa stable". The report examines the sovereign in four categories: economic strength, which is assessed as "very high (+)"; institutional strength "very high (+)"; fiscal strength "very high"; and susceptibility to event risk "low". 

The report constitutes an annual update to investors and is not a rating action. 

Moody's report says that Australia's government debt burden is moderate relative to similarly rated peers, and this is another factor supporting its Aaa rating. 

However, Moody's expects that the Australian government will face challenges in narrowing the budget deficit at the pace envisaged in the last budget. Moderate nominal GDP growth continues to weigh on revenues and a splintered Senate makes passing budget consolidation measures politically challenging. As a result, the gross debt burden of the general government will rise to 41% in fiscal 2017 (the year ending 30 June 2017) from 36.1% in fiscal 2015. 

Even with an increase in government debt, Australia's debt ratios will remain moderate when compared to some Aaa-rated sovereigns, and the government's debt affordability will remain very strong. 

Moody's points out that Australia faces two types of shocks, but that the country has sufficient buffers to counter any negative effects. 

Specifically, Moody's says that high and rising household debt exposes the sovereign to the risk of a potential downturn in the housing market. 

The second potential shock relates to the public and private sectors' long-standing dependence on external financing which exposes the economy and financial system to a shift in foreign investors' assessment of the attractiveness of Australian assets. 

Moody's explains that if there is a negative shock from either of these two factors, the scope for monetary or fiscal policy easing, combined with strong institutions and a well-capitalized banking sector would mitigate the negative economic or fiscal impact, and support the continued availability of external financing.