Australia keeps TripleA rating after Morrison’s confidence on cutting deficit

Australian share markets surged ahead on Monday after federal treasurer Scott Morrison presented the government’s mid-year economic outlook (MYEFO) reaffirming a return to budget surplus by the financial year ending June 30 2021. After listening to Morrison’s numbers, and his four-year timeline, the three main ratings agencies, Moody’s, Standard & Poors, and Fitch, announced they would retain Australia’s AAA rating, confounding predictions by ABC, the national broadcaster, and the Australian Financial Review, the country’s business newspaper.coal-and-iron-ore

The detailed forecasts presented by the treasurer were nowhere near as pessimistic as many analysts had predicted, but indicated that the budget deficit would blow out by an additional $410.3 billion before moving back towards surplus.

In a well-choreographed and competent presentation jointly with finance minister Matthias Cormann, Morrison predicted GDP growth this year at a reduced 2%, rising to 2.5% in 2017-18, and 3% for the ensuing two years, partly built on higher commodity prices for iron ore and coal.  However, the government is not expecting the recent increases in these prices to hold much beyond 18 months, a judgement applauded by Moody’s in a statement made shortly after the presentation. The government gave the main reason for the additional blowout as a significant shortfall in tax revenues from individuals and corporations, due to flat wages growth and lower company profits.

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Colin Chapman comments: The statements by Scott Morrison and the able Matthias Cormann sounded more credible on Monday than on many previous occasions, and there were signs of more grit and determination from the ministers than has been apparent in the recent past.

By comparison Labor’s Chris Bowen, a normally competent shadow treasurer, seemed adrift and evasive in his comments to the media, particularly in an interview with Sky News’ political editor David Speers, who asked him at least four times to say what Labor would do to stimulate jobs and growth, if elected.  After avoiding the question, Bowen said that Labor would provide more support for the National Broadband Network, but declined to advance any other ideas.

While Morrison’s refined projections have economic credibility – involving modest tax cuts for business – the government will continue to face difficulties in getting passage for a swathe of spending cuts through Senate, including trimming welfare payments. It’s noteworthy that S&P only kept its AAA rating afloat after two other agencies had given their backing, and did so reluctantly, perhaps because it did not want to have to justify being the odd one out. The agency said it remained “pessimistic about the government’s ability to close existing budget deficits.”.

It seems clear that the government has been spared by the recent rises in the prices of coal and iron ore, but it not counting on sustained higher prices.  Early in the New Year a Treasury razor gang will be reconvened to seek more cuts. In the meantime, the share market will end the year on a higher note, the Australian bond market is enjoying a boom comparable, in relative terms, to that of the United States, and the housing market can look forward to a six month period of stable interest rates.

Canberra is now on holiday for six weeks, and Coalition MPs can go to the beach in a more comfortable position than seemed likely just days ago.

 

Read the MYEFO documents.

 

 

 

Coalition shoots itself in the foot

Australian politics, never pretty, has taken a further ugly turn, as the government shot itself in the foot over an open conflict between former prime minister and now Liberal backbencher Tony Abbott, and the party’s current leader, prime minister Malcolm Turnbull.

The governing Coalition had planned to focus parliamentary attention on a bill now before the Senate to reinstate the construction industry watchdog, abolished by the Gillard government, and thereby hopefully to restore some semblance of law and order to the nation’s overpriced construction industry, overshadowed by union threats to company officers and other thuggery.

About 100 members or associates of the Construction, Forestry, Mining and Energy Union(CFEMU)  are awaiting trial for serious crimes. The Australian Financial Review recently described the union’s business model as “law-breaking”

“Behind the raw statistics are campaigns of violent intimidation by which the Labor-affiliated CFMEU uses its monopoly over the supply of workers to control major construction sites, extending into blatant price-fixing arrangements with construction companies that ratchet up the cost of building everything from office towers to transport infrastructure”, the paper opined.

The working days lost to industrial action in the construction industry in the past year is five times the national average.

Instead of a planned focus on this legislation, which is rejected by Opposition leader Bill Shorten in return for a CFEMU pledge to back his party leadership, Mr Turnbull was forced into open warfare with Mr Abbott over gun control. Ironically both men back a current ban on importing  the multi-action Adler shotgun, but the issue that divided them was whether Mr Abbott, when prime minister, had supported negotiations with a cross bench senator over its import in return for his support for the anti CFEMU legislation.

Australian media, on permanent watch for any break out of hostilities between the two men, had  a field day, as did the Opposition front bench, which plied Turnbull with questions he did not answer very well.

Another week of no progress in Australian politics.

Michelle Grattan on the Turnbull-Abbott battle

Too many new apartments may squeeze bank profits

Australia is facing an oversupply of new apartments in its three largest cities leading to a suggestion by the central bank that possible defaults may put pressure on lenders – especially Chinese ones – and put a brake on economic growth.

The risk was set out by the Reserve Bank of Australia in its latest Financial Stability Review. The new governor, Dr Phillip Lowe is expected ro provide more details at a keynote speech at Monday’s Citi Australian investment conference in Sydney.

The RBA notes that housing price growth has slowed, and the share of high loan to value and interest only loans has fallen, but points to mining regions where many households  are in stress because house values have fallen below outstanding mortgage debt. Repossessions in Western Australia have edged higher.The RBA points to a large supply of new apartments coming on stream, particularly in the inner-city suburbs of Brisbane and Melbourne.

“One risk associated with the large volume of construction underway is that off-the-plan purchases fail to settle. Liaison with the property industry points to some concern that this will become more common in Brisbane, Melbourne and Perth”, the RBA states. “Liaison with banks and industry suggests that in Melbourne, and increasingly in Brisbane, valuations for off-the-plan apartments are often below contract process”. Many of these buyers are either offshore, or Australian residents dependent on overseas incomes, including pensions, which Australian banks, astonishingly, will no loger accept.

The likely outcome of this potential oversupply is that banks will be called upon to maintain higher reserves, which will put further pressure on profits, and accounts for the poor performance of bank shares lately. Faced with a profits squeeze, the banks will have the choice of increasing interest rate margins for home loans and business, or cutting dividends.

The RBA has an interest comment on this: “

“Higher capital levels are expected to have a persistent effect on ROE. Indeed, analysts’ expectations are for Australian banks’ ROE to remain on average around 121⁄2 per cent over the next couple of years. While this is high by international standards and appears to be above banks’cost  of equity, it is lower than the returns to which Australian banks and their investors have become accustomed.

In theory, investors might be expected to accept the lower ROE that results from higher capital levels. This is because the reduction in leverage reduces volatility and risk in returns. If investors do accept lower returns, banks could adjust their target ROE lower. However, investors’ expectations may not adjust immediately and banks may feel pressured to maintain historical levels of ROE. “

 

 

 

 

Miner Gina set to become the biggest pastoralist

Australia’s richest woman Gina Rhinehart has finalised her bid for S Kidman and Co, Australia’s biggest landholder.

Partnering with ith Shanghai CRED,  she’s formed a company, Australian Outback Beef,  to acquire all of Kidman’s assets,  except the politically sensitive Anna Creek cattle station, near Woomera, South Australia. Her Hancock Mining  will have 67 per cent, Shanghai CRED, owned by Chinese businessman Gui Guojie, will own 33pc.

The deal requires the support of Treasurer Scott Morrison after a FIRB review, but is likely to be approved.

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The Hancock bid is totally different from a previous Majority(80pc) Chinese bid fort Kidman that Morrison recently reje ted, when the 20pc Australian participant was not sufficiently capitalized to afford its stake. The Turnbull; government will also be keen to show Beijing that it is not against Chinese investment. Beef exports  from Australia to China increased 13 fold ibetween 20-12 and 2014, and are expected to rise by another $100 billion by 2030. Sino-Australian Cattle and Beef Relationship.

A recent report from  the Registry of Foreign Ownership of Agricultural Land reveals only 13.6 per cent of Australian farmland is owned by overseas entities.

Interests from Britain, the US, Singapore and The Netherlands own substantially more than China, which claims only about 1.4 million of the 385 million hectares of agricultural land. British investors own 27.5 million hectares — which is more than half of all land owned by foreign interests — and US investors own seven million hectares.

On a state-by-state basis, the registry revealed Queensland is home to the most land owned by foreign interests (17.658 million hectares), but the Northern Territory has the highest percentage of overseas land investment, with about a third of farmland no longer held by Australian companies or individuals.

 

 

Changing the mix in power generation

Federal and state energy ministers meet Friday in Melbourne to try and plot a future mix in the production of electricity that balances a secure and reliable supply with an increase in the clean energy component. Like most other meetings of COAG it is doomed to fail, because of deep differences of opinion between the Coalition government and Labor and the Greens on the speed of change.

In the wake of cyclonic winds and storms that shut down the entire power supply to the state of South Australia for three days in the past fortnight, the debate now attracts more public interest, as well as pointing up the opportunities for further Chinese investment.

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At the moment only the island state of Tasmania is fully dependent on renwable energy because of its suberb hydro-electric schemes.  Elsewhere, as the chart shows, South Australia is the leader, with 41.3 percent from renewables, mostly less than consistent wind power. Although it contains the world’s largest uranium mine, it does not have a nuclear power station, nor does any other state, because Labor and the Greens proscribe this development.

Victoria has 12.1 per cent from renewables, but plans to double this by closing its main coal-fired power station, which provides the biggest single source of power to the city of Melbourne. Queensland has ambition plans to convert to 50% renewables, which is now national Labor policy.The problem is Opposition leader Bill Shorten has yet to explain who is going to pay for it, though the answer is – the public.

In terms of investment, here is a state-by-state breakdown of foreign ownership of generation.

ACT: Singapore Power Corporation owns 40 pc.

NSW: It had hoped to lease its poles and wires to a Chinese company, but this was vetoed  by the Treasurer. It is looking for a new lessee.

South Australia: Cheung Kong Infrastructure/Power Assets owns a 51-per-cent share, on a 200-year lease, in SA Power Networks Electricity Distribution network.

Victoria: China’s State Grid Corporation State Grid owns a 20-per-cent share in AusNet Services Electricity Distribution. It also owns 60 per cent of Jemena, the company which owns Jemena Electricity Distribution Victoria and 34 per cent of United Energy Electricity Distribution Victoria.Cheung Kong Infrastructure/Power Assets owns a 51-per-cent share in both CitiPower Electricity Distribution Network Victoria and Powercor Electricity Distribution Network Victoria.