Australia – Morrison Secure, for Now

Although there is little to suggest that the incumbent Liberal-National government might be toppled from office before the completion of the current three-year term in 2022, Prime Minister Scott Morrison’s administration faces fresh challenges from the COVID-19 pandemic, amid a resurgence of infections in Melbourne, the capital of the state of Victoria. A renewed lockdown in the country’s second largest city is a most unwelcome development, as it figures to reinforce the economic damage inflicted by a national lockdown imposed earlier this year to limit the spread of the virus.

The troubles in Victoria are unlikely to benefit the main opposition ALP, which has headed the state government there since 2014. Recent polls show the Coalition and the ALP running neck-and-neck nationally, suggesting that the pandemic has not significantly affected the preferences of the electorate either way.

There has been a notable shift in Australia’s foreign policy posture of late toward the strengthening of ties with regional and global rivals of China. Relations with China have soured considerably since Morrison’s government called for an official inquiry into the origin and spread of the coronavirus, implying that China bears responsibility for the pandemic, and backed the UK in condemning Beijing’s violation of Hong Kong’s autonomy.

Although the economic importance of trade with China means Australia must display some restraint, for example, not directly blaming Beijing for a recent cyberattack attributed only to a “state actor,” the Morrison government’s attempts to lure businesses and skilled professionals from Hong Kong carries a risk of retaliatory moves by China, including the arbitrary detention of Australian citizens in Hong Kong and mainland China.

The government was projecting a federal budget surplus in the fiscal year to June 2020 before authorities initiated a massive spending spree to counter the negative economic fallout from the pandemic. The cost of the emergency measures is estimated at 10% of GDP but could increase if officials bow to pressure to extend programs aimed at providing relief to households and businesses beyond the current expiration date in September.

Australia still boasts an across-the-board AAA debt rating, but both Fitch and Moody’s have put their ratings on negative watch, and the risk of a downgrade will grow if the government moves too cautiously to rein in the large budget deficit, in which case the debt-to-GDP ratio could rise to near 70% by 2022, up from just 46% last year. A moderate rebound from an estimated contraction of 4.4% in the fiscal year to June 30 is forecast for 2020/2021, but new outbreaks of coronavirus underscore the risk of a more generalized second wave of infections that necessitates additional growth-stunting health measures.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and sales@prsgroup.com, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.

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