Fitch Ratings Affirmed Australia’s ‘AAA’ With a Stable Outlook

Fitch ratings has issued its latest ratings report on Australia, affirming Australia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘AAA’ with a Stable Outlook. Australia’s growth pre-pandemic was one of the strongest in the developed world. and it has recovered from the Pandemic strongly than most with a strong trade surplus. Australia saw a rapid rise in the working age population with fast net immigration accounting for over half of the expansion pre-pandemic help fuel the strength.

Key Ratings Drivers


  • Strong Institutions Support Rating
  • Fiscal Performance Improves
  • Slight Deficit Widening
  • Structural Fiscal Challenges
  • GDP Growth Moderating
  • Tightening Cycle at its End
  • Household Debt Risks Limited
  • House Prices Show Resilience
  • Strong Banking Sector
  • External Finances
  • ESG – Governance


Strong Institutions Support Rating: Australia’s rating is underpinned by the country’s high income per capita, as well as strong institutions and an effective policy framework, which facilitated nearly thirty consecutive years of economic growth before the Covid-19 pandemic and continues to support resilient growth outcomes amid global shocks. The recent outperformance of public finances relative to our expectations further supports the Stable Outlook.

Fiscal Performance Improves: On a general government (GG) basis, we forecast the fiscal deficit to narrow to 1.2% of GDP in FY23 (ending June 2023), from 3.8% in FY22, on consolidation at the federal and aggregate state level. The federal government is set to achieve its first underlying cash surplus in 15 years at 0.2% of GDP in FY23, from a 1.4% deficit in FY22, according to the FY24 budget on 9 May. This is well below the 1.5% of GDP FY23 deficit forecast in the October 2022 budget due to robust revenue from a strong labour market and buoyant commodity prices, combined with spending restraint.

Slight Deficit Widening: We forecast a slight widening of the GG deficit to 1.6% of GDP in FY24. Still, we expect a slightly lower federal underlying cash deficit in FY24 than the budget, as we forecast higher commodity prices and nominal GDP growth. The federal budget shows a return to a modest 0.5% of GDP underlying cash deficit, against a 1.8% forecast in the October 2022 budget. The commitment in the budget to save most of the revenue windfalls over the five-year budget horizon signals a commitment to prudent fiscal management.

Structural Fiscal Challenges: We forecast GG debt to tick up slightly to 49.7% of GDP in FY25, from a Fitch-estimated 49.1% in FY23 (AAA median 36.3%), before gradually trending down. Slowing nominal GDP growth, moderating commodity prices and structural spending pressures, particularly from the National Disability Insurance Scheme (NDIS), are expected to push the GG deficit up to 2% of GDP in FY25, before narrowing.

The government took some initial steps to address structural pressures in the FY24 budget through revenue measures and adjustments to NDIS. Even so, longer-term pressure remains in the absence of additional structural reforms.

GDP Growth Moderating: We forecast GDP growth to ease to 1.5% in 2023 from 3.6% in 2022. Higher interest rates and still-elevated inflation will weigh on consumer spending, although households could use their savings buffers to smooth consumption. Services exports are showing a strong recovery, while the rebound in the Chinese economy provides a modest benefit. Net inward migration has recovered rapidly after the border reopening, which should support the economy’s resilience and help alleviate labour constraints.

Tightening Cycle at its End: We believe that the Reserve Bank of Australia has reached the end of its tightening cycle following its 25bp policy rate hike earlier this month to 3.85%. This represents a cumulative 375bp policy rate increase since May 2022. Inflation was high at 7% in 1Q23, but is past its peak. We forecast inflation to drop to 3.5% by end-2023, but services inflation could prove persistent.

Household Debt Risks Limited: Australian households, which have one of the highest levels of debt to disposable income (around 188%) among ‘AAA’ peers, are likely to face pressure from rising debt-servicing burdens. Transmission of rates has been relatively fast, as about 75% of households with mortgages are currently on floating-rate mortgages and most of those with fixed-rate loans are set to roll on to higher rates in the next two years, mainly in 2023.

We expect rising rates to dampen consumption, rather than pose financial stability risks. Prudent mortgage serviceability buffers instituted by regulators mean most households have been assessed at rates around prevailing levels. Sizeable household assets (5.7x the value of debt), including a large build-up in liquid financial assets in the past few years, and mortgage pre-payment by many households should cushion rising debt-servicing burdens. A solid labour market and our expectation that unemployment remains low, should also limit potential stress.

House Prices Show Resilience: Australian house prices are down 8.0% through April 2023 from their April 2022 peak (on the heels of a 26% rise from March 2020). Recent months have seen a modest rebound in prices, particularly in Sydney. We now see a 10% (from 15%-20% previously) peak-to-trough fall in house prices, with some possibility of further weakness in 2023. The peak in the interest rate cycle, combined with strong housing demand, in part from a recovery in inward migration, will be supportive.

Strong Banking Sector: Fitch believes banks are well-positioned to manage risks due to strong capital positions, resilient profitability and sound underwriting standards. Asset quality is likely to deteriorate only modestly from a strong initial position (0.7% non-performing loan ratio). Fitch’s stress test of Australia’s four major banks in July 2022, with a scenario of a 5% default rate and 30% fall in house prices, well beyond our baseline, resulted in losses that did not exceed 0.3pp of risk-weighted assets or 10% of pre-impairment operating profit.

External Finances: The external finance profile remains weak compared with peers, but is improving on sustained current account surpluses. We forecast the surplus to be relatively stable at 1.4% of GDP in 2023 as strong goods and services exports offset higher income payments. External financing risks are limited despite high net external debt of around 47% of GDP (AAA median 22% net creditor position). Banks have reduced their reliance on external funding over the past decade and funding needs are well-managed. Households have accumulated large equity asset holdings in the past several years.

ESG – Governance: Australia has an ESG Relevance Score (RS) of ‘5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Australia has a high WBGI ranking at 91.2, reflecting its long record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.


Back in 2021 Fitch issued a note on Migration as a Key Supply-Side Growth Driver

Australia Net Migration 1971 to 2020

Note this release by the ABS covers data up to 30 June 2020 and as such, covers the start of the COVID-19 pandemic period. Some of the changes recorded in this release are due to the impact of the pandemic.

Australia’s historical GDP growth performance was one of the strongest among large, developed economies prior to the pandemic, averaging 2.9% between 2000 and 2019. We believe this was driven by a rapid rise in the working age population, reflecting fast net immigration, which accounted for over half of the expansion. Historical productivity performance was, by contrast, lacklustre. – Fitch

The ABS found that in 2020, there were over 7.6 million migrants living in Australia. This was 29.8% of the population that were born overseas. One year earlier, in 2019, there were 7.5 million people born overseas.

Nearly every single country from around the world was represented in Australia’s population in 2020.

  • England (980,400) continued to be the largest group of overseas-born living in Australia. However, this decreased from just over a million, recorded throughout the period 2012 to 2016
  • Those born in India (721,000) were in second place, with an increase of 56,300 people
  • Chinese-born (650,600) fell to third place, with 17,300 fewer people
  • Those born in Australia (18.0 million) increased 211,400 during the year.


Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

– Macro: Economic or financial sector distress resulting from impaired household debt-servicing ability, for instance, from a structural deterioration in the labour market or substantial decline in house prices.

– Public Finances: A renewed upward trend in the general government debt/GDP ratio over the medium term, for instance, from an absence of a sufficient fiscal consolidation strategy.

– External: A sharp widening of the current account deficit and weakening of external finances stemming from spillovers to commodity prices from an acute slowdown in China’s economy or rising regional geopolitical tensions.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

– The ratings are at the highest level on Fitch’s scale and cannot be upgraded.

Source: Fitch ABS

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