Aust. currency debt downgraded

Press, 30 August 1989, Page 39

Aust. currency debt downgraded

NZPA-Reuter New York Moody’s Investors Services has lowered to AA-2 from AA-1 the debt ratings on about SA23 billion ($NZ29.728) of Australian long-term foreign currency debt. Moody’s cited as reasons for the downgrade a variety of macroeconomic, political and structural factors that have generated large and continuing current account deficits, thereby increasing the country’s foreign-currency debt. In Wellington, the New Zealand dollar was dragged down by the bad news from across the Tasman, but still managed to finish 18 points up for the day. The kiwi dollar closed at U55893/03c after falling steadily after the rating announcement from its opening of U55875/85.

The Australian dollar also recovered slightly late yesterday in local trading after dropping sharply in reaction to Moody’s decision.

The Australian dollar closed at U57575/82C after the knee-jerk reaction of traders drove it down from U57603/10c to U57560/70C within minutes of the announcement from the American ratings agency. Moody’s said the downgrading of Australia affected senior bond obligations of the Commonwealth Government, five of its agencies, nine State government entities and five private sector institutions.

The agency said the country’s deficit has burgeoned in the past two years, reaching 5.2% of gross domestic product for 1989. It said the effect has been a rise in total country debt, both public and private. Moody’s said that Australia’s debt service ratio was out of line with other AA-1-rated countries since the last downgrading in 1986.

Moody’s - said it expected Australia’s relative external debt position to worsen before it stabilised in the mid-19905.

The agency said the downgrading also reflected the Government’s inability to control excessive domestic demand growth, insufficient progress in generating additional export-earning capacity and in restructuring industry to achieve productivity gains, and the continued slow pace of structural adjustment.

Moody’s said these factors made it harder for Australia to weather the next downturn in the global business cycle without further large increases in foreign-cur-rency debt. Moody’s also cited structural weaknesses in Australia’s domestic and international position, such as intransigent rigidities in the local labour and transport market, which constrained international competitivness.

Also, the agency said Australia’s continuing dependence on commodity exports placed foreign exchange earnings at the mercy of fluctuating terms of trade.

Moody’s said the sAust23B of bond debt affected by the downgrading represented that portion of Australia’s gross foreign currency liabilities of sAust63.s billion ($NZ82.048) that was rated.

Moody’s ratings committee had virtually decided to downgrade Australia’s sovereign debt rating before the Federal Budget was brought down on August 15, the investors service’s senior analyst, Mr Roger Nye, said.

Mr Nye said the downgrading to AA-2 from AA--1 was based on a longterm fundamental analysis of the Australian economy.

However, he also said the current pilots dispute was an example of Australia’s failure to achieve structural economic adjustment.

“It’s like Australia has shot itself in the foot,” Mr Nye said of the dispute. The Federal Treasurer, Mr Paul Keating, said Moody’s downgrading of Australia’s credit rating was unjustified and its judgement “ill-founded.”

He said the Federal Goverment had no net overseas debt and had not borrowed in the markets for more than two years.

“Overseas creditors consider Australia a good credit risk,” Mr Keating said.

“Australia can and is servicing its debt. “For these reasons, the Moody’s judgment is illfounded and vindicates the Government’s decision to put Australia’s reputation and independence above that of a New York company,” he said.

The New York-based investment bank, Salomon Brothers, said Moody’s decision to downgrade Australia’s sovereign debt rating was unjustified. “It is not justified and there are two reasons why,” Salomon’s Sydney office managing director, Mr Trevor Rowe, said. “In the 1989-90 Federal Budget, we have a large surplus and secondly, the retirement of public sector debt.

“The servicing cost of public sector debt as a proportion of gross domestic product is falling,” Mr Rowe said.

Markets remained concerned about Australia’s foreign debt and current account deficit, Mr Rowe said. “We have a fiscal surplus running at 2% of GDP and net public sector debt will be retired at the rate of 1% of GDP in fiscal 1989-90. That’s where we have difficulties with the Moody’s decision to downgrade,” he said.