Aussie initially came under considerable pressure during Asian market open after it became clear over the weekend that the parliamentary elections would not result in a clear majority for either party. Australia's political uncertainty has spooked markets because of the potential for further budget deterioration, with all three international ratings agencies expressing concern about the potential for policy paralysis.
The Coalition’s message that cutting Australia’s elevated level of company tax would raise economic growth and generate jobs failed to connect with voters, while its warnings about the danger of greater budget deficits under Labor also failed to stem the leakage of votes. The Liberal-National coalition leads in 66 seats compared to 72 seats for the Labour Party with both falling short of the 76 seats required to hold a majority in the lower house. Vote count to resume tomorrow when the final results are expected. According to Bloomberg, postal votes may decide as many as 12 unclear seats.
The prospect a hostile Senate means the chance of legislating the company tax cuts is now in doubt, even if the Coalition can form a majority government while neither side of politics has any other agenda for raising productivity or lifting demand. Economic stability will be hard to offer in an international economy still not fully recovered from the global financial crisis and now further battered by Brexit and the issues it poses.
Net debt, meanwhile, is predicted to climb to a record 18.9 percent of gross domestic product in the fiscal year through June 2017, and rise again to 19.2 percent in the ensuing 12 months, according to Turnbull’s administration. During Australia’s mining boom — the then-coalition government used the windfall of extra revenues to cut income taxes to levels that wouldn’t provide sufficient revenue during “normal” fiscal times.
“The election outcome bodes poorly for the nation, growth and prosperity and it likely increases the risk of a risk of a persistent and deteriorating structural budget deficit, further weakening Australia’s AAA stable sovereign rating,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney.
Political deadlock leaves the Reserve Bank as the only institution capable of influencing demand but, as both governor Glenn Stevens and his deputy Philip Lowe have often argued, the central bank’s manipulation of interest rates has only a transitory effect on the economy and cannot alter its potential growth rate.
In the immediate aftermath of the Saturday election results, which have yet to be finalized, Moody’s Investors Service said there were limited implications for now for Australia’s AAA grade, while Fitch Ratings said a wider deficit could put downward pressure on the score. S&P Global Ratings said it could lower the rating if parliamentary gridlock on the budget continues.
AUD-USD fell from closing levels of around 0.7500 on Friday to levels below 0.7450. However, the weakness proved short-lived. The pair recovered and was trading above the 0.75 handle at 0.7530 around 1100 GMT.
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