Moody's has restored the country's top Aaa foreign-currency rating, which was dropped two levels following the famous remarks made in1986 by then treasurer Paul Keating
Australia is no longer a banana republic. That's the message some investors took from Moody's Investors Service's move to raise the nation's foreign-currency rating two levels to a top Aaa.
Lest you wonder if the previous paragraph lacks cultural sensitivity, it was former treasurer Paul Keating who, in 1986, famously warned his country might become a small, dependent nation in the middle of nowhere. A short time later, Moody's downgraded Australia's credit.
Keating went on to serve as prime minister from 1991 to 1996 but many investors still smart over the episode. Earlier this month, Moody's finally restored its top rating, boosting the dollar and stocks.
It also resurrected the debate over whether investors should consider Australia. A careful look at the Moody's statement on Australia suggests investors should indeed.
Moody's argued that one of the biggest disincentives to invest in Australia, a plunging currency, might no longer exist. The Australian dollar's weakness in recent years had many investors avoiding the country.
The Moody's news underlined that 'the financial position of Australia is sound,' says Nick Tribe, who helps manage A$3.5bn in fixed-income securities at Portfolio Partners in Melbourne.
Moody's said its upgrade wasn't triggered by any specific event in the economy but by changes in its standards for assessing risk. It also boosted ratings in New Zealand and Iceland. That still didn't detract from its importance to Australia. In a nutshell, Moody's said risks of currency instability in Australia have diminished. And that's no small thing.
Such comfort is vital if Australia is to attract more capital. Even though Canberra avoided the 1997 Asian financial crisis and produced decent growth and low inflation, many investors steered clear.
Instead, they focused on the currency's slide. As recently as April 2001, it was doing worse against the US dollar than the Brazilian real, Indonesian rupiah and Romanian leu.
Investors and Australians wondered what was happening. The Aussie dollar may have averaged 72 US cents throughout the 1990s but it was below 50 US cents at the beginning of the 21st century. In mid-2001, everyone from Reserve Bank of Australia governor Ian Macfarlane to officials at the International Monetary Fund was proclaiming the currency undervalued. Investors, meanwhile, were fleeing.
Blame it on the 'commodity-currency' label. Even though Australian companies embraced new economy technologies as aggressively as most, Australia was still viewed as an Old Economy nation.
Harder to dismiss were investor concerns about Australia's current account deficit. The gap widened to A$7.47bn in the second quarter alone as imports rose and falling commodity prices cut earnings at exporters such as WMC Ltd and Santos Ltd. It was expected to be A$7.3bn.
In other words, Australia requires massive inflows to fund its current account deficit and a stock market that is playing an unprecedented role in the economy. Investors have long viewed such dependence as a vulnerability. If money stops funnelling into Australia, some fear, there could be a currency crisis or a falling one, at least.
Deficit or not, the Moody's upgrade implied some degree of confidence in the Australian dollar. At a minimum, it suggested the widening current account deficit isn't as important as it was in the past and the chances the economy can lure capital are improving.
Current account deficits do matter and, at some point, investors may punish Australia. But then economists have predicted a similar meltdown in the US dollar for years. The strong American dollar continues to confound views the US current account deficit is a disaster waiting to happen. Could it be such imbalances are now less of a problem?
Moody's hinted as much when it called Australia's upgrade 'the next step in the evolution of its foreign currency risk assessment'. As such, it gave the nation the same foreign-currency credit ratings as the US, France and Germany. Even with a growing current account gap, the Aussie dollar yesterday rose to 55.95 US cents, its highest level since 17 July.
Investors in Australia have had a better year than those in the US and Europe. The S&P/ASX 200 Index is down 12% this year in US dollar terms. The Dow Jones Industrial average is off more than 16% this year, while the Bloomberg European 500 index has lost more than 28%.
As Australia has negligible foreign debt, the Moody's upgrade means little for Canberra's finances in the short run. Yet Moody's also raised the foreign currency debt ratings on four Australian states to Aaa from Aa2. New South Wales, for example, plans to borrow A$2bn overseas this year.
Companies could be helped too. Now that they are sitting under the umbrella of a top-rated country once again, more investors might buy their debt. Lower borrowing costs certainly wouldn't hurt Corporate Australia, especially those planning to tap global markets.
It has taken more than a dozen years but Australia's rating is back where it was before Keating's 'banana republic' comment. Investors might be wise to pay attention.
Bloomberg newsroom, Tokyo
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