WARNING ON DEBT BLOWOUT
UBS raises alarm on ‘shocks’ risk
AUSTRALIA is increasingly gorging on debt at a time when the economy is growing too slowly to keep the nation’s liabilities in check, a global financial services heavyweight has warned.
Already facing a sharp decline in the value of its exports, the nation is placing its treasured triple-A credit rating at risk through its failure to chip away at debt in recent years, Swiss banking titan UBS says.
In a report by economists George Tharenou and Scott Haslem, UBS says Australia’s total debt relative to our annual economic output has surged to an all-time high.
The ratio of debt to the nation’s gross domestic product – a key measure of a nation’s economic stability – shot up by 18 percentage points to 249 per cent in the three months to June.
It means that for every $1 worth of goods and services produced in Australia each year, the nation’s households, businesses and governments owe $2.50.
The nation’s total debt pool, now at about $4 trillion, is expanding by 10 per cent a year.
Australia now finds itself in the same field as the European Union and China on the metric, although well behind Japan’s mind-boggling 400 per cent debt-to-GDP ratio.
Australia’s household wealth is rocketing thanks to booming property prices and low interest rates, the UBS report says.
But that has also seen the household savings rate drop sharply in the past two years.
“When debt spikes too quickly, it raises the vulnerability of the real economy to future asset price and interest rate shocks,” Mr Tharenou says in the report.
It comes as the Federal Gov- ernment looks to cut spending, and as businesses also pare back their capital expenditure.
Mr Tharenou says the Reserve Bank of Australia board, which meets today, is unlikely to lift interest rates for some time as a consequence.
“With likely fiscal consolidation ahead, and a capex (capital expenditure) cliff, these are key reasons why we expect the cash rate to remain at a record low for a sustained period.”
Analysts widely expect the RBA to leave the cash rate on hold at 2 per cent today.
Mr Tharenou says ratings agency Standard & Poor’s is still a chance to put Canberra’s stable credit outlook on negative watch.