O 092213Z FEB 09
FM AMEMBASSY CANBERRA
TO SECSTATE WASHDC IMMEDIATE 0969
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THE WHITE HOUSE WASHINGTON DC
DEPT OF TREASURY WASHINGTON DC

C O N F I D E N T I A L CANBERRA 000135 
 
 
DEPARTMENT FOR EAP, EAP/ANP, E, EEB, AND EEB/OMA 
DEPARTMENT PLEASE PASS USDA FOR WAINIO 
TREASURY FOR CHRISTOPHER WINSHIP 
NSC FOR LOI 
 
E.O. 12958: DECL: 02/09/2019 
TAGS: EFIN ECON AS
SUBJECT: RESERVE BANK GOVERNOR DISCUSSES ECONOMY 
 
REF: A. CANBERRA 116 
     ¶B. 2008 CANBERRA 1036 
 
Classified By: Charge Daniel Clune for reasons 1.4 (b/d). 
 
¶1. (C) Summary: Reserve Bank of Australia Governor Glenn 
Stevens told Charge that Australia will face a difficult 2009 
as the result of an unprecedented worldwide loss of 
confidence by consumers and businesses.  The RBA and the 
Australian Government are taking aggressive measures to 
stimulate the slowing domestic economy, according to Stevens, 
who said PM Rudd,s A$42 billion (USD 26 billion) stimulus 
plan (ref A) is about right in terms of size in the face of a 
very fast and steep fall in global demand.  The RBA,s rapid 
interest rate cuts (a full 4.0% since September) have also 
helped maintain demand, as did the Government,s A$10.7 
billion in cash payments in December, of which Stevens 
believes half was spent.  The RBA Governor said that 
Australia,s financial system remains in good shape and that 
the four major banks have already met most of their off-shore 
financing requirements for 2009.  He said that the downturn 
would drive up unemployment and cut 2009 growth to 0.5%, 
while the end of the commodity boom would cause a significant 
unwinding in Australia,s terms of trade and a noticeable 
fall in real incomes.  Despite these challenges, Stevens 
stressed Australia,s continuing scope for further action 
based on the RBA,s room for further interest rate cuts and 
what he expects will be the strong demand for Australian 
Government debt as the Government moves into deficit 
spending.  He cautioned that regardless of what Australia 
does, the near-term state of its economy will depend on the 
depth of the downturns in China and the United States. End 
Summary 
 
Australia's Economic Ride About to Get Rougher 
--------------------------------------------- - 
 
¶2. (C) Charge and Econcouns met in Sydney February 6 with 
Glenn Stevens, Governor of the Reserve Bank of Australia. 
Stephens was joined by Kate Ford, his Economics Assistant. 
Stephens said that the global financial system appears to be 
stabilizing since the &unprecedented8 period between 
September 15 and October 15, 2008.  He said that he was 
surprised at the speed with which emerging market countries 
had been affected by the global financial crisis and at the 
massive fall in global demand.  In particular, Stephens cited 
the near-collapse of Chinese growth as a surprise, saying 
that it probably was close to negative in the fourth quarter 
of 2008.  Expressing cautious optimism that the worst of the 
financial crisis may be over, with the return of credit 
spreads to more normal levels, Stephens said that the 
challenge for 2009 would be how countries manage the economic 
impact of unprecedented falls in global demand. 
 
¶3. (C) Australia has been in the comparatively lucky position 
of being spared the first wave of damage due to the relative 
strength of its financial system and the earlier impact of 
Qstrength of its financial system and the earlier impact of 
the resources boom.  Unemployment remains at the historically 
low level of 4.5%, though Stephens expect this to climb 
sharply in the coming months.  This ability to observe the 
impact of the crisis in other countries has allowed 
Australian policy-makers to try to head off the worst by 
prompt action, though Stevens allowed that it is impossible 
to know if this will be enough to prevent a very serious 
recession. 
 
¶4. (C) The coming 12-18 months will be difficult for economic 
policy-makers around the world, Stephens said.  He emphasized 
that Australia remains in comparatively good position for the 
following reasons: 
 
-- The RBA's 3.25% interest rate leaves room for further 
cuts; 
 
-- The Government entered the crisis with a net asset 
position and a large budget surplus, leaving it in 
comparatively good position to take further action after 
committing close to 5% of GDP to stimulate demand over two 
years; 
 
-- The financial system remains healthy and has access to 
global capital markets. 
 
All could change depending on the depth of the crisis, but 
whatever happens in Australia is likely to be less severe 
than in many other developed countries. 
 
Stimulus Debate 
--------------- 
 
¶5. (C) The RBA has moved quickly to use monetary policy to 
stimulate the economy through five consecutive interest rate 
cuts totaling 400 basis points since September, with the most 
recent being a 100 basis point cut to 3.25% on February 3. 
Stephens said this has delivered significant relief to 
consumers but has had little impact on business confidence. 
(nb: the vast majority of  Australian mortgages are have 
variable interest rates that reset the next month after a 
change in the official interest rate. end nb.)  The 
Government's A$10.7 billion stimulus package announced in 
October 2008 (ref b) appears to have also helped, with 
Stephens, highlighting the December increase in retail sales 
(3.7% higher than December 2007) as well as the steady 
unemployment rate.  He estimated that about half of the 
amount of direct payments to lower and middle-income 
Australian families with children and to retirees appears to 
have been spent (which would equate to about 0.5% of GDP). 
The Government's second stimulus package worth A$42 billion 
announced by PM Rudd on February 2 is about the right 
magnitude, Stephens commented, adding that he had hoped that 
the combination of this plan and the RBA's 100 basis point 
interest rate cut the next day would create a "wow factor" 
that might help restore confidence. 
 
¶6. (C) Noting the debate in Australia over the need for 
deficit spending to fund the package given the fall in tax 
revenue, Stephens said that the projection that net debt will 
reach 20% of GDP in the next five years does not concern him 
very much.  Markets had historically shown considerable 
appetite for Australian Government debt and that this would 
be a manageable amount in the short to medium term.  Slower 
longer-term global economic growth would raise more 
questions, as this might signal a structural reduction in the 
Government's tax revenues that might lead markets to 
reexamine their appetite for Australian securities.  The real 
question is the quality of the measures -- do they include 
investments that will lift longer-term productive capacity. 
Asked about the possible impact of significant Government 
debt issuance on the Australian dollar, Stephens doubted that 
there would be much of an effect in the short term. 
Governments as a whole continue to be able to borrow cheaply, 
and while the amount of government debt on issue globally is 
Qand while the amount of government debt on issue globally is 
increasing rapidly, Australia has a good reputation on 
international markets.  Also, Australian interest rates 
remain higher than in other developed countries. 
 
Current Account Deficit and the Banks 
------------------------------------- 
 
¶7. (C) Though Australia's comparatively large current account 
deficit (CAD) is frequently raised by the IMF as a potential 
problem, Stephens expressed confidence that it remains 
manageable in the near term.  The CAD will probably not 
increase much despite the fall in export earnings because 
slower domestic demand will reduce demand for imports. 
Australia's CAD is largely funded by the country's four major 
banks, but Stephens said that obtaining funding this has not 
been a problem.  After U.S. banks, Australia's four major 
banks have been the most active on global credit markets and 
have successfully raised between $50-60 billion in offshore 
term funding in the past several months.  Their ability to do 
this has been strengthened by the Australian Government's 
guarantee, which has brought down their borrowing costs. 
Stephens said that this amount represents almost all of their 
funding requirements for 2009, meaning that Australia is 
largely insulated from potential danger from its CAD for the 
rest of the year. 
 
It's All About China and the United States 
------------------------------------------ 
 
¶8. (C) While 2009 will be difficult for Australia regardless 
of what happens around the world, developments in the United 
States and China will play the greatest role in shaping 
Australia's economic future.  The speed and degree to which 
both countries return to growth will determine the extent of 
the downturn and shape the prospects for a return to growth 
for Australia.  Stephens expressed hope that the United 
States and China will strengthen cooperation on economic 
issues, saying that this would both support growth as well as 
increase confidence. 
 
Clune