Moody's: Australia's economy displays resilience to commodity price declines, but external financing risks linger

Moody's Investors Service says that Australia (Aaa stable) will be the fastest growing Aaa-rated commodity exporting economy in 2016 -- a reflection of its resilience to shocks, as export volumes have increased strongly despite falls in metals prices, and the services sector has benefited from a weaker domestic currency. Moody's expects Australia to maintain higher GDP expansion than Canada and Norway, and a similar rate to New Zealand (all Aaa stable) over coming years.

Aaa-rated Australia, Canada, New Zealand and Norway all export commodities, ranging from oil to iron ore to milk. While commodity prices have risen in recent months, they have not recovered from the sharp falls seen in 2013 and 2014. Moody's assumes that commodity prices will remain well below their previous peaks over the next few years.

Still, Australia -- like New Zealand -- faces external financing risks. Trade and current account deficits spanning several decades reflect a reliance on external financing, and leave both countries vulnerable to shifts in investor sentiment. But the robustness of Australia's institutions, deep capital markets and low foreign currency debt mitigate the risk of any abrupt tightening in financing conditions.

Moody's conclusions are contained in its just-released report on Australia, entitled "Government of Australia - Comparison with Commodity-Exporting Aaa Peers Reveals Economic Resilience, but also External Financing Risks."

Moody's expects Australia's fiscal deficits to remain wider for longer than the government forecasts, and to be higher than in New Zealand and Norway, but not Canada, over the coming years. Government debt will rise as a result to around 41% of GDP in 2017 -- higher than in New Zealand and Norway. But that will still be much lower than in Canada and some other Aaa-rated sovereigns.

Moody's also points out that Australia, Canada, New Zealand and Norway have all experienced rapid increases in house prices and household debt, exposing their economies and financial systems to negative shocks. Nonetheless, the intrinsic financial strength of Australia's banks -- which is somewhat higher than in Canada, New Zealand and Norway -- lowers the potential cost of government support to the banking system in the event of stress.