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4 May 2016
Australia: Uncontroversial budget with few risks to AAA rating - Nomura
Research Team at Nomura, suggests that the Australian budget looks likely to have little impact on macro and market prospects over the coming year or two.
Key Quotes
“Deficit and debt levels have been revised a fraction higher, but not enough to seriously concern rating agencies in our view. A number of policy changes have been announced, but there are no big bang initiatives on the infrastructure front, meaning the burden of policy adjustment will continue to fall on the cash rate and AUD.
Overall, we see only limited market impacts from budget. The higher estimates for CGS on issue have attracted some attention, but this has yet to translate into a market impact. We think rating agencies will be comforted by the medium-term path of deficit reductions (and a peaking in net debt/GDP) and that the AAA rating is therefore unlikely to be at risk.
Our biggest disappointment with this Budget is that it passed up on an opportunity – which was discussed in the media, pre-Budget – for a more aggressive and innovative fiscal infrastructure initiative. The Budget may plant some seeds for increased activity in this space, but it looks to be a very slow burn. We note that, in contrast, the Canadian government recently adopted a more expansive fiscal stimulus plan. This means that the burden of adjustment, in helping support the economy through a challenging transition (and in an uncertain world) will continue to fall on the AUD and the cash rate. It seems likely – as we suggested earlier today – that the RBA was well aware of this when it surprised a (narrow) majority of economists and market participants (including ourselves) by lowering the cash rate to 1.75%.
With yesterday’s action and statement by the RBA, and this budget, we retain our forecast cash rate cut, of 25bp in November. The risk at this stage looks to be for a little more easing, rather than a little less, particularly with the RBA appearing more concerned about longer-term inflation trends and risks.”
Key Quotes
“Deficit and debt levels have been revised a fraction higher, but not enough to seriously concern rating agencies in our view. A number of policy changes have been announced, but there are no big bang initiatives on the infrastructure front, meaning the burden of policy adjustment will continue to fall on the cash rate and AUD.
Overall, we see only limited market impacts from budget. The higher estimates for CGS on issue have attracted some attention, but this has yet to translate into a market impact. We think rating agencies will be comforted by the medium-term path of deficit reductions (and a peaking in net debt/GDP) and that the AAA rating is therefore unlikely to be at risk.
Our biggest disappointment with this Budget is that it passed up on an opportunity – which was discussed in the media, pre-Budget – for a more aggressive and innovative fiscal infrastructure initiative. The Budget may plant some seeds for increased activity in this space, but it looks to be a very slow burn. We note that, in contrast, the Canadian government recently adopted a more expansive fiscal stimulus plan. This means that the burden of adjustment, in helping support the economy through a challenging transition (and in an uncertain world) will continue to fall on the AUD and the cash rate. It seems likely – as we suggested earlier today – that the RBA was well aware of this when it surprised a (narrow) majority of economists and market participants (including ourselves) by lowering the cash rate to 1.75%.
With yesterday’s action and statement by the RBA, and this budget, we retain our forecast cash rate cut, of 25bp in November. The risk at this stage looks to be for a little more easing, rather than a little less, particularly with the RBA appearing more concerned about longer-term inflation trends and risks.”