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Fitch: Aussie Debt Ceiling Hike Belies Fiscal Commitment

HONG KONG/SINGAPORE, October 24 (Fitch) The hike in Australia's sovereign debt ceiling to AUD500bn is a significant increase in comparison with recent adjustments. But it does not constitute a loosening of fiscal policy or an imminent jump in the debt burden, says Fitch Ratings. Unlike the US, Australia's parliamentary system of government should ensure a smooth passage of the new bill, albeit with vigorous debate. Australia's stated commitment to reaching a balanced budget over the medium term is backed by a long track record of fiscal prudence. Moreover, the recently formed Commission of Audit signals a broad review of expenditure - with the objective of lowering non-essential spending. One reason why we do not believe the hike in the debt ceiling signals an imminent loosening of fiscal policy is because we expect the new Coalition government will remain on track to reaching a modest budget surplus by 2016-2017. This would also be broadly in line with the roadmap set by the outgoing Labour government. The absence of any deep ideological divide between political parties on core aspects of fiscal management is a key factor underpinning Australia's strong sovereign credit profile. Overall fiscal discipline is enshrined in the Charter of Budget Honesty Act, enacted in 1998. This has forged a durable social consensus on maintaining a balanced budget through the economic cycle, assuming no significant external shocks. Moreover, the recent formation of a Commission of Audit to thoroughly review the activity of the Commonwealth government is credit positive. It highlights the new government's efforts to generate cost savings, and improve the overall efficiency and productivity of government services. The current ceiling of AUD300bn on the Federal debt is set to be breached in December, as the timeframe for reaching a budget surplus has been extended. It therefore makes procedural sense to raise the ceiling to accommodate a delayed stabilisation of the debt level. Fitch estimates that Australia's general government debt, which includes both federal and state debt, will rise to around 35% of GDP in 2015, up from 32% in mid-2013. Meanwhile, the Commission of Audit's terms of reference were disclosed earlier this week. The sweeping review of government activity could result in expenditure rationalisation, welfare reduction, privatisation of state assets, and consolidation of government agencies and functions. The upshot of all this is that recent steps undertaken by the new Coalition-led government signals a potential overhaul of the role of the government in consonance with the stated goal of fiscal consolidation. It is unlikely to result in any near-term loosening of policy in a manner which could threaten Australia's (AAA/Stable) sovereign credit profile. Art Woo Director Sovereigns +852 2263 9925 Aninda Mitra Senior Director Fitch Wire +65 6796 7232 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.