Identifier
Created
Classification
Origin
09MELBOURNE81
2009-07-15 05:29:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Melbourne
Cable title:  

Standard and Poor's Bullish on Australian Economy

Tags:  ECON EFIN ETRD AS 
pdf how-to read a cable
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UNCLAS SECTION 01 OF 02 MELBOURNE 000081 

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD AS
SUBJECT: Standard and Poor's Bullish on Australian Economy

Ref: A) Melbourne 58, B) Canberra 575

Summary
-------

UNCLAS SECTION 01 OF 02 MELBOURNE 000081

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD AS
SUBJECT: Standard and Poor's Bullish on Australian Economy

Ref: A) Melbourne 58, B) Canberra 575

Summary
--------------


1. (SBU) Analysts at Standard and Poor's Melbourne headquarters
predict a mild and short recession in Australia. The country's
states remain among the best rated in the world despite the February
downgrading of Queensland from AAA to AA. While Australia maintains
a substantial current account deficit funded almost entirely by
wholesale foreign borrowing, S&P is bullish on Australia's dominant
big four banks. Some pundits believe that there are still tough
times ahead for the Australian economy, but observers are
increasingly optimistic due to growing optimism about China's demand
for Australian resource exports. End Summary.

Optimistic Outlook
--------------


2. (SBU) Standard and Poor's (S&P) Managing Director for Australia
and New Zealand John Bailey and two senior analysts told visiting
Econcouns and Congenoff July 13 that they are optimistic about the
direction of the Australian economy. While Australia remains
heavily dependent on Chinese exports, the country is still not
meeting Chinese demand for raw materials. Aggressive fiscal and
monetary policies have helped blunt the impact of the global
slowdown. They assessed that Australian employers are "hoarding"
labor by increasing their numbers of part time workers rather than
laying off staff. Consumer spending has held up better than
expected as a result of steep falls in interest rates as well as
government stimulus. Lower interest rates and the Government's
incentives for first time home buyers have propped up the
residential market, which has avoided significant declines and will
probably strengthen slightly due to strong demand growth.


3. (SBU) Turning to international regulation, Bailey expressed some
concern about Australia getting ahead of the rest of the world in
regulating ratings agencies. According to Bailey, Australia may be
the first country to license ratings agencies and he contended that
this must be harmonized with International Organization of
Securities Commissions (IOSCO) standards. Bailey pointed out,
however, that the GOA has been sensitive to S&P's concerns and that
he is more worried about regulations coming out of the European
Union countries.

Healthy States, Healthy Nation
--------------


4. (SBU) S&P rates Australia's states as AAA/stable except
Queensland, Tasmania and New South Wales. The ratings agency sees
the credit quality of Australia's states as among the best for state
governments in the world. (Note: The Northern Territory is not
rated. End note.) S&P's analysts explained that they downgraded
Queensland to AA+/stable in February due to that state's decision to
proceed with planned infrastructure spending even though the global
slowdown began to bite into its revenues. This income includes
Goods and Services Tax (GST -- which is collected by the federal
government and distributed to the states to cover costs such as
health and education) as well as "stamp duties" or revenues
collected by the states from the sale of real estate and cars.


5. (SBU) Australia's other states have made provisions to reduce
planned capital expenditure in order to avoid increasing their debt
burden. New South Wales' outlook fell to AAA/negative in August
2008 despite efforts to reduce capital spending; S&P determined that
the state may not be able to effectively shut off planned
infrastructure spending. Tasmania is rated AA+/stable due to
relatively low growth, lower incomes, and a higher dependence on
federal revenue streams.

Strong Banks Mitigate Current Account Deficit
--------------


6. (SBU) Bailey and his analysts contend that Australia's
vulnerabilities flowing from its substantial current account deficit
(reftels) are offset by the strength of its big four banks
(Commonwealth, Westpac, Australia New Zealand Banking Group - ANZ,
and the National Australia Bank - NAB). S&P maintains AA/stable
ratings on all four banks because the ratings agency believes the
global downturn will have a relatively limited impact on the

MELBOURNE 00000081 002 OF 002


Australian economy. In addition, Australia's "four pillars" policy
(which prevents these banks from merging or being acquired) has
insulated them from external competition while cementing their hold
over traditional banking markets in Australia and New Zealand.
Banking executives have told us that they have successfully
increased their margins in recent months despite historically low
interest rates.

Comment
--------------


7. (SBU) While the consensus view among many of Melbourne's economic
experts is beginning to crystallize around the idea that Australia's
recession will likely be short and mild, some maintain that the
worst may still be ahead for the Australian economy. Most
Australians agree, however, that Australia's well-being is and will
continue to be intimately tied to a sustained Chinese appetite for
its commodities exports.

THURSTON