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Sept. 6 (Bloomberg) -- The winner of tomorrow’s Australian election will find their scope for economic stimulus to tackle the worst unemployment in four years constrained by the fastest debt buildup among major economies.
The International Monetary Fund estimates Australia’s gross borrowing has almost tripled to 27.6 percent of the economy, compared with 2007, when Prime Minister Kevin Rudd first won office. While government debt pales next to the 108 percent level for the U.S. and 95 percent for the euro region, the increase contrasts with a combined A$81.6 billion of surpluses recorded in the six years before Rudd took office.
Both opposition leader Tony Abbott, who leads in opinion polls, and Rudd have pledged to end budget deficits even as the cooling of a mining boom led the Reserve Bank of Australia to cut growth forecasts. Fiscal restraint will help maintain the allure of sovereign debt that offered 6.7 percent annualized returns since 2007, the most after New Zealand among developed economies, attracting the world’s biggest investors.
“The challenges going forward would be to maintain our strong public debt metrics and claw back some of that recent deterioration,” said Stephen Miller, a Sydney-based money manager at BlackRock Inc., which oversees $3.9 trillion. Whoever wins the elections will have to “focus on some of the structural issues that face us to help meet the challenge of transitioning from growth led by the mining sector.”
BlackRock likes Australia’s bonds compared with those of other developed nations, favoring shorter-term notes that offer a “substantial” yield advantage and amid prospects for another RBA rate cut, Miller said.
The South Pacific nation’s two-year yield rose three basis points to 2.63 percent yesterday, the highest after New Zealand and Portugal among developed nations tracked by Bloomberg. The yield on benchmark 10-year debt was 4.07 percent.
Investors see a 51 percent chance the RBA will cut rates to 2.25 percent or less by April 1, swaps data compiled by Bloomberg show.
Outstanding long-term government securities swelled to A$265 billion as of Aug. 30, data from the Australian Office of Financial Management show, from A$54 billion at the end of November 2007, when Rudd’s Labor party defeated John Howard’s Liberal-National coalition. The funding arm said last month it expects to sell a record A$60 billion of bonds in the year ending June 30, which will push the debt pile toward the A$300 billion debt ceiling.
The Liberal-National coalition, which has pledged to cut 12,000 civil service jobs and lower automaker subsidies, said yesterday its savings will allow it to trim outstanding debt by A$16 billion as of June 30, 2017. Treasury said the Australian government’s outstanding fixed-income securities will climb to A$370 billion by then, according to the pre-election economic forecasts.
Rudd has warned that Abbott’s cutbacks could tip Australia into recession. Labor has promised additional assistance for the nation’s floundering car industry and a high-speed rail network linking the country’s most-populous cities.
After winning office almost six years ago pledging to run budget surpluses, the global financial crisis of 2008 led Rudd to bring in a A$42 billion stimulus package to help the economy avoid falling into recession for the first time since 1991.
Australia’s budget deficit will widen to A$30.1 billion in the year ending June 30 and will continue to record a shortfall until the 2015-16 period, Treasury said Aug. 13. The government forecast the unemployment rate will rise from 5.7 percent in July, the highest since September 2009, to 6.25 percent in 2014.
Under Julia Gillard, who ousted Rudd in 2010 and then was replaced by him in June, the Labor Party scrapped a pledge to end budget deficits by this year as tax revenue dropped.
“In order to generate any spending measures, the government’s going to have to raise debt to do it,” said Martin Whetton, a Sydney-based interest-rate strategist at Nomura Holdings Inc. While debt is “nowhere near the metrics that ring warning bells,” he said, its continued growth at the current pace may become a problem amid a sluggish economy.
A report this week showed the Australian economy grew 2.6 percent in April to June from a year earlier, beating economist forecasts for 2.4 percent expansion and adding to evidence the RBA’s interest-rate cuts to a record 2.5 percent are providing a boost. Growth remains below the average of 3.1 percent in the past year.
“The increased liquidity in the bond market has been a plus to some of the larger foreign buyers of Australian debt,” said Kieran Davies, chief economist at Barclays Plc in Sydney. “But there needs to be a demonstrated path toward getting back to a surplus. With the economic improvement we’re seeing in the rest of the world, it’s going to be harder to entice some potential buyers.”
Australian government debt has delivered a 46 percent return since November 2007, according to Bank of America Merrill Lynch index data. It has declined 0.8 percent this year, set for the first annual loss since 2009, the figures show. That compares with a 3.9 percent slide for U.S. Treasuries since Dec. 31.
Offshore investors purchased A$1.9 billion of notes with maturities longer than a year in the second quarter, taking their share of total debt to 69.1 percent from a three-year low of 68.3 percent. Foreigners’ holdings peaked at 76 percent in the three months to June 30, 2012. Central banks including the Bundesbank and Bank Rossii have added the Aussie to reserves.
The Aussie dollar was at 91.44 U.S. cents yesterday at 6 p.m. in Sydney, after reaching a three-year low of 88.48 cents on Aug. 5.
The proportion of Australia’s gross borrowing relative to its A$1.45 trillion economy will reach a peak this year, according to IMF data going back to 2006. The nation’s debt burden will ease to 26.7 percent in 2014 and drop to 17.1 percent by 2018, the estimates show. That compares with a projected increase in the U.S. debt-to-GDP ratio 109.2 percent next year.
“There is a common commitment to returning to balanced budgets and to maintaining moderate debt levels” among Australia’s main political parties, said Sean Keane, an Auckland-based analyst at Triple T Consulting and the former head of Asia-Pacific rates trading at Credit Suisse Group AG.
“The growing debt pile would only become an issue for markets if that commitment changed, or if it appeared as though the long term ability of the country to pay its debts was in question,” Keane said. “Neither of those things are likely at present.”
--Editors: Garfield Reynolds, Sandy Hendry