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Send  Share  RSS  Twitter  12 Feb 2009

EXPORTS: Australasia Downgraded


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Credit insurer Coface has downgraded the credit rating of four of the countries considered to be the economic powers in the Australasia region.

The downgrades suggest a significant change in the credit security of businesses in a region which, until now, has withstood the pressures of the global financial crisis better than Europe and the US.

Australia, New Zealand, Taiwan and Hong Kong have all been downgraded by Coface in its latest credit review. The reasons for the downgrades differ for each country, but as a whole there is concern about the economic stability of the region.

The most drastic downgrade by Coface is Australia which has seen a downgrade from and A1 to and A2. The usual process for the downgrade of a country is to place it on negative watch and observe trends for a further three months. A decision is then made whether to downgrade the country; retain its negative watch or remove the negative watch. Coface very seldom makes a full downgrade decision unless there is significant cause.

Economists are coining the current fall in the Australian economy as the fastest fall in that country’s history with predictions of a Aus$16-billion drop in government’s surplus budget supply. And Australia has now experienced two quarters of negative growth with predictions now of large scale unemployment of up to 300 000 jobs rife.

The major contributor to Australia succumbing to the global financial crisis has to do with its large scale exports of raw materials to China. With China starting to feel the global slowdown, its imports of raw material have dropped dramatically, contributing to Australia’s economic slump.

Australia is one of the major economic contributors in the Australasia economy and the slowdown in the Australian economy has far reaching impact.

Australia is almost solely responsible for the economic well being of New Zealand which is integrally linked through the CER agreement, which facilitates closer economic relations.

The agreement has greatly benefited both countries in the past by encouraging free trade between them. The downside however of so closely linking the two economies is the potential recession for both of countries when one fails.

In the case with Australia being one of New Zealands largest trading partners, Australia’s increased default ratio has negatively affected New Zealand’s economy to the extent that Coface has downgraded New Zealand’s business credit rating from an A1 negative watch to A2.

Australia is also directly linked to the economy of Hong Kong through a strong import and export relationship. Australian businesses are no longer able to extend the same credit terms to business partners in Hong Kong purchasing Australian goods.

In addition, Australian businesses are importing less from Hong Kong. The slowdown is further exacerbated by Hong Kong’s trade relationships with mainland China which has also slowed. As a result, Coface has downgraded Hong Kong from an A1 negative watch to an A2 rating.

Taiwan is another region that has been downgraded by Coface. Taiwan and Australia have a profitable informal trade relationship which includes the import from Taiwan into Australia of fuel and telecommunications/IT infrastructure. With the combined slowdown in the Australian economy, the impacts of the Chinese economy and the fluctuations in oil price, Taiwan has also been downgraded from an A1 negative watch to and A2 rating.

The downgrade of the Australasia region as a whole, while reflective of the global slowdown, is cause for concern. Coface will be watching the default indices of these countries with interest over the next 3 to 6 months.


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