VZCZCXRO7558
RR RUEHPT
DE RUEHBN #0081/01 1960529
ZNR UUUUU ZZH
R 150529Z JUL 09
FM AMCONSUL MELBOURNE
TO RUEHC/SECSTATE WASHDC 4965
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHBS/USEU BRUSSELS
RUEHBJ/AMEMBASSY BEIJING 0078
RUEHKO/AMEMBASSY TOKYO 0073
RUEHGP/AMEMBASSY SINGAPORE 0234
RUEHIN/AIT TAIPEI 0012
RUEHBY/AMEMBASSY CANBERRA 3610
RUEHWL/AMEMBASSY WELLINGTON 0001
RUEHPT/AMCONSUL PERTH 1585
RUEHDN/AMCONSUL SYDNEY 2105

UNCLAS SECTION 01 OF 02 MELBOURNE 000081 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD AS
SUBJECT: Standard and Poor's Bullish on Australian Economy 
 
Ref: A) Melbourne 58, B) Canberra 575 
 
Summary 
------- 
 
¶1. (SBU) Analysts at Standard and Poor's Melbourne headquarters 
predict a mild and short recession in Australia.  The country's 
states remain among the best rated in the world despite the February 
downgrading of Queensland from AAA to AA.  While Australia maintains 
a substantial current account deficit funded almost entirely by 
wholesale foreign borrowing, S&P is bullish on Australia's dominant 
big four banks.  Some pundits believe that there are still tough 
times ahead for the Australian economy, but observers are 
increasingly optimistic due to growing optimism about China's demand 
for Australian resource exports.  End Summary. 
 
Optimistic Outlook 
------------------ 
 
¶2. (SBU) Standard and Poor's (S&P) Managing Director for Australia 
and New Zealand John Bailey and two senior analysts told visiting 
Econcouns and Congenoff July 13 that they are optimistic about the 
direction of the Australian economy.  While Australia remains 
heavily dependent on Chinese exports, the country is still not 
meeting Chinese demand for raw materials.  Aggressive fiscal and 
monetary policies have helped blunt the impact of the global 
slowdown.  They assessed that Australian employers are "hoarding" 
labor by increasing their numbers of part time workers rather than 
laying off staff.  Consumer spending has held up better than 
expected as a result of steep falls in interest rates as well as 
government stimulus.  Lower interest rates and the Government's 
incentives for first time home buyers have propped up the 
residential market, which has avoided significant declines and will 
probably strengthen slightly due to strong demand growth. 
 
¶3. (SBU) Turning to international regulation, Bailey expressed some 
concern about Australia getting ahead of the rest of the world in 
regulating ratings agencies.  According to Bailey, Australia may be 
the first country to license ratings agencies and he contended that 
this must be harmonized with International Organization of 
Securities Commissions (IOSCO) standards.  Bailey pointed out, 
however, that the GOA has been sensitive to S&P's concerns and that 
he is more worried about regulations coming out of the European 
Union countries. 
 
Healthy States, Healthy Nation 
------------------------------ 
 
¶4. (SBU) S&P rates Australia's states as AAA/stable except 
Queensland, Tasmania and New South Wales.  The ratings agency sees 
the credit quality of Australia's states as among the best for state 
governments in the world.  (Note: The Northern Territory is not 
rated.  End note.)  S&P's analysts explained that they downgraded 
Queensland to AA+/stable in February due to that state's decision to 
proceed with planned infrastructure spending even though the global 
slowdown began to bite into its revenues.  This income includes 
Goods and Services Tax (GST -- which is collected by the federal 
government and distributed to the states to cover costs such as 
health and education) as well as "stamp duties" or revenues 
collected by the states from the sale of real estate and cars. 
 
¶5. (SBU) Australia's other states have made provisions to reduce 
planned capital expenditure in order to avoid increasing their debt 
burden.  New South Wales' outlook fell to AAA/negative in August 
2008 despite efforts to reduce capital spending; S&P determined that 
the state may not be able to effectively shut off planned 
infrastructure spending.  Tasmania is rated AA+/stable due to 
relatively low growth, lower incomes, and a higher dependence on 
federal revenue streams. 
 
Strong Banks Mitigate Current Account Deficit 
--------------------------------------------- 
 
¶6. (SBU) Bailey and his analysts contend that Australia's 
vulnerabilities flowing from its substantial current account deficit 
(reftels) are offset by the strength of its big four banks 
(Commonwealth, Westpac, Australia New Zealand Banking Group - ANZ, 
and the National Australia Bank - NAB).  S&P maintains AA/stable 
ratings on all four banks because the ratings agency believes the 
global downturn will have a relatively limited impact on the 
 
MELBOURNE 00000081  002 OF 002 
 
 
Australian economy.  In addition, Australia's "four pillars" policy 
(which prevents these banks from merging or being acquired) has 
insulated them from external competition while cementing their hold 
over traditional banking markets in Australia and New Zealand. 
Banking executives have told us that they have successfully 
increased their margins in recent months despite historically low 
interest rates. 
 
Comment 
------- 
 
¶7. (SBU) While the consensus view among many of Melbourne's economic 
experts is beginning to crystallize around the idea that Australia's 
recession will likely be short and mild, some maintain that the 
worst may still be ahead for the Australian economy.  Most 
Australians agree, however, that Australia's well-being is and will 
continue to be intimately tied to a sustained Chinese appetite for 
its commodities exports. 
 
THURSTON