Australia becoming more of a risk than New Zealand
The borrower is on a trend decline amid uncertainty about the outcome of early elections in July. It means New Zealand is looking the safer bet, despite its slightly lower ECR score and inferior credit rating.
Keeping his eye on the ball: Australian prime minister Malcolm Turnbull’s neck
Australia, on a country-risk score of 81.02 from a maximum 100 points, and New Zealand, on 80.57, are both tier-one credits.
They rank among the safest bond investments worldwide in Euromoney’s survey, which categorizes the views of 400-plus experts on 186 sovereign credits into five tiers according to their relative risk.
Political stability, sound economies and structural strengths make both sovereigns reasonably safe investments, and triple-A rated Australia is still favoured over New Zealand, which has AA ratings from Fitch and S&P.
But look closely at the chart (below) and a couple of interesting trends can be gleaned.
First is the narrowing of the gap that opened up through 2014, despite it temporarily re-emerging in the closing months of 2015.
The second trend, which isn’t mutually exclusive, is the decline in Australian bond safety. New Zealand’s long-term trend is also downward-sloping, but not over the past two years.
Euromoney’s survey is collated quarterly, with the latest readings before Australia's prime minister, Malcolm Turnbull, called for a double dissolution federal election. Scheduled for July 2, this involves all members of the Senate and House of Representatives, and is aimed at resolving the legislative deadlock blocking Turnbull's government’s agenda.
At present, Turnbull’s Liberal/National Coalition is running neck and neck in opinion polls with Bill Shorten’s Labor Party, contributing to policymaking uncertainty about the two camps’ priorities and the margin of victory affecting government stability.
Robin Clements, senior economist for UBS New Zealand, says this is a bigger risk than usual.
“Compared with previous elections there is a more distinct choice, where Labor is proposing several policies regarded as business unfriendly,” he notes.
Labor’s plans for more public investments, tax changes and stiffer environmental targets are likely to fuel concern over what it will mean for economic growth and fiscal targeting.
If Labor gets in, Australia mght easily be propelled below New Zealand in the global rankings.
National Australia Bank economist John Sharma believes Australia’s public-finance position is strong, but notes the lack of a medium-term consolidation strategy.
The official projections show a small budget surplus by 2020-21, but Sharma and his colleagues at NAB have some concerns about the projections for nominal GDP.
Both countries are facing economic challenges from China’s slowdown. The dairy products price collapse is a big factor for New Zealand, but is offset by the positives from construction, migration and tourism supporting economic growth.
GDP growth is solid in Australia, too: most forecasters, including the IMF, predict 2.5% in real terms this year.
Yet, as Clements notes: “Australia’s exposure to hard-commodity exports makes it more vulnerable than the soft-commodity dependency of New Zealand,” a factor that could keep Australia’s current account deficit higher than New Zealand’s.
To see the slump in iron-ore prices, take a look at this five-year trend.
NBA’s Sharma concurs. “Our team estimates the terms of trade to be 10% lower than the Treasury’s by 2016-17. This could add A$15 billion [$10.9 billion] over two fiscal years to the underlying cash deficit.”
ECR factor scores
Australia has a higher debt rating than New Zealand, but the latter outscores its neighbour on no fewer than nine of the 15 economic, political and structural risk factors contributing to the total risk score. Besides this, Australia’s relative fiscal strengths could be expected to wane under an assumed Labor Party programme despite its promises to maintain fiscal prudence.
Some experts are already voicing their concerns that Australia is not quite as safe as its AAA ratings suggest.
New Zealanders would almost certainly agree.
Claire Matthews, a director at the Massey Business School, concedes that there are risks surrounding the 2017 elections in New Zealand, and the budget surplus there is small and fragile.
However, “New Zealand has had much greater political stability compared with Australia, where instability of political leadership has been greater than generally accepted, and additionally they are now dealing with low commodity prices.”
It would also appear that investors cannot afford to ignore the risks. This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.