23 February 2017
Transcript - #2017019, 2017

Interview with Matt Taylor and Bernie Lo, CNBC

SUBJECTS: Australian Government bonds issuance; credit rating; Budget 2017; backing Australians in our transitioning economy; Turnbull Government’s Enterprise Tax Plan to drive economic growth; trade.

MATT TAYLOR:

Australian Treasurer Scott Morrison joining us live from his office in Sydney this morning. Treasurer, thanks very much, record sale on that $11 billion parcel that I just mentioned. What was the demand like coming out of the investment market for the Australian paper?

TREASURER:

Well over $20 billion and that’s the other very encouraging part of this story today, is that Australian bonds, confidence in Australian sovereignty and security, in terms of these issuances is at record levels. I think that says a lot about the stability and strength of the Australian economy and our broader position. We’re pleased to see that, as you say, it came off the back of a very good outcome late last year, both with another 10 year but also later last year, also we had our first 30 year bond, so all of this I think points to the security of Australian sovereign bonds, and that is something I think is a real vote of confidence.

BERNIE LO:

Absolutely Treasurer, this is Bernie Lo in Hong Kong joining the conversation. Can I ask you, just, hypothetically, and just for the sake of argument, why did you go 11 years out, why did you choose an 11 year tenor with a coupon of $2.75 bps with a YTM of just over three? I mean, in this environment right now, before anybody has really pulled the trigger on rates, you could have gone out to 30 years, you could have done an ultra-long, for probably 100 bps above your cost of funding in this instance.

TREASURER:

Well, we’ve already, we had our first 30 year last year, and that was ground breaking for us. This is more of our normal mode of business. The Australian Office of Financial Management works through these processes according to the targets they set, form the Government, and we’ll be looking at it again soon. These three results are really, I think, when you’re getting these connecting points in the story, underscores the point we’ve been making, both here domestically, and more broadly internationally, that the debt markets themselves are making their own judgment on Australian sovereign bonds and it is a very positive one. We’re a AAA credit economy of course, but the better rating than you get from anywhere is the way that bond markets themselves rate you and that’s what we’ve seen again overnight.

LO:

Ok understood there, so basically you’re just kind of diversifying everything along the yield curve and don’t want to pile too much into ultra-long, or too much into short, or mid-term. Question Treasurer, with the increasing number of people getting into their golden years, and concerned about beyond the work years, and providing for their retirement years with a longer life span, that sort of thing. Is there potential for an increased activity, in some sort of analogy to TIPS in the U.S. They’re a very popular tool – Treasury Inflation-Protected Securities – something of that nature. Wouldn’t that be a real hit with superannuation providers?

TREASURER:

You’ve got to provide more and more, I think, products and offering, and not just from the Government’s side but also from the private sector. If there’s one common message that I get back from the large pension funds, not just here in Australia, but overseas, is that there’s a lot of capital out there and they’re looking of places to put it which gives them both the security and the return, and Australia presents a really good opportunity for that. A lot of the work we’re doing, particularly in the area of finance, infrastructure financing, and how we structure those things with our state governments, we’re seeking to create those opportunities, those longer term opportunities which provide those yields over a longer time, with a very guaranteed income stream which they can rely on. It doesn’t matter whether that’s coming out of real state or whether it’s coming out of infrastructure of other forms, I think there’s a real hunger for this. The more we can do things in that way, I think it’s better. You mentioned the 30 year bond, I said it was our first run at that, and there is a real appetite for that, particularly when we’re looking at our longer term needs and particularly around infrastructure.

TAYLOR:

Let’s move on to the AAA rating, because you just mentioned the attractiveness of Australian paper in light of the AAA rating, but we know that at least one ratings agency has said that Australia is now on negative watch. This is Standard and Poors, we have the Budget coming up in May, the ratings agencies are going to be looking closely at that, how are you going to offset these ongoing concerns from the ratings agencies about the AAA rating?

TREASURER:

One of the things that is often raised in the northern hemisphere is Australia’s Current Account Deficit, now our Current Account Deficit today is in a relatively much better position than it’s been for a very long time, and that’s one of the issues that is often raised by those agencies. There’s also the fiscal position. When you look at Australia’s debt to GDP, and gross debt to GDP is still under 30 per cent, and I can tell you there are many countries that sit round the G20 table which would be happy to swap places with us on that. That said, we’re seeing very good performance out of our export industries, particularly our services sector, and the transition that is happening in the Chinese economy is very synchronised with what’s happening in our own economy, we’ve come out of the mining investment boom, and moved more in a diversified way to our services economies, what we’re seeing in tourism, education, these areas, financial services, this is putting us on a strong footing going forward. So, look, that’s the dynamic, and I think exciting story about the Australian economy, what I find reassuring about what’s happening in the debt markets, is I think those markets are understanding that story, and at the end of the day ratings agencies I think will take good notice of what’s actually happening in the actual market.

TAYLOR:

Let’s talk about the actual, one of the actual markets which is the commodities markets and iron ore, of course, has been on a tear in recent weeks, topping $90, the highest level since 2014. That must make you feel a bit better when you are sitting down and formulating those Budget papers. Of course in the mid-year update you forecasted it at $68 a tonne. This boost that we are seeing in the iron ore price, how much of a benefit is that going to have when it comes to the Budget deficit, the Budget bottom line?

TREASURER:

Well, you don’t chase it up the hill and you don’t chase it down to the valley when you are trying to structure a Budget. In economies such as Australia’s, with our Budget, which is very resource focussed as other countries with different types of commodities in Canada and places like that, you have got to ride the waves with these things on commodities. You do not frame your Budget around those types of things. If it indeed proves sustainable then obviously there would be support for the Budget. That is not a licence to go out and spend money. Just as if your revenue as we have seen over the last few years but even in the last 12-18 months we have had pretty significant impacts on our revenue estimates based on what is happening with wages growth, what is happening with inflation but also what had previously happened in commodity prices. You do not chase that down the hill either by slashing and burning in order to reflect and offset what is happening with those prices. You are right, the pressure has been upward and we have taken very modest estimates when it comes to those commodity prices in the mid-year statement and I think the fact that we’ve been, in a very Australian way, very upfront about the nature of these things I think that played well in the markets. I think people see us as being very direct about our situation and I think that gives markets confidence and I see no reason why it wouldn’t give ratings agencies confidence as it did in December when all three of them reaffirmed our AAA rating.

LO:

Absolutely, to just reaffirm and hopefully that would stick for quite a while. Scott, just on that note with the resurgent recovery, this recovery we are seeing right now in the commodities space. Do you feel, is Australia better positioned to absorb more activity in resources this time? The last time, with the big boom, it was accompanied by all types of stories and you saw them as well as I did; big huge spreads in Time Magazine about truck drivers making $250,000 a year and just completely through the roof property prices in places like northern WA. Do you think this time it occurs in a much more stable environment without crazy asset bubbles happening which were partially responsible for the hard coming down last time?

TREASURER:

I don’t know if that was what was responsible for it but these sorts of impacts were very isolated to very specific parts of the country. It is a very, very big country. If you look on the Eastern seaboard and what has been happening with real estate prices there, that is just the fundamental story of supply and demand. This isn’t about investors’ speculative finance driven bubbles. That is not something that has been occurring in our markets. I don’t think that’s been the consensus view here about those markets. The nature of resources, particularly mining investment booms, is that you will have these pressures build up in the system. The last boom we saw was a once in a lifetime, once in a generation boom. It is always a challenge for us to continue to build on our capability to absorb these things and to have a capability to drive more productivity about what occurs. We have our own sovereign wealth fund now that has a particular purpose attached to it. It is on its way to around $150 billion and these mechanisms provide good opportunities to also absorb some of the benefits when we can get the Budget back into balance to ensure that those benefits are longer term for future generations.

TAYLOR:

Just a final question before we let you go. You are, of course, joining us in the thick of the Australian corporate earnings season. One of your key economic policies is a cut to the corporate tax rate. What business leaders, CEOs from Australia’s top companies have been telling us this earning season is they want it to hurry up, they want some clarity on this and even the Reserve Bank Governor just in the last week or so has said Australia needs to be more competitive on the corporate tax front. I know you are facing pressure from your political opponents on this one but what is your message to corporate Australia about what you are doing on the corporate tax front?

TREASURER:

We set out our plan very clearly in our Budget in May where we moved to reduce the corporate tax rate on a glide path down to 25 per cent starting with small and medium sized businesses. Now, since then we have seen the announcement in the United States, we have even seen the French Government adopt a very similar position. In the UK they are committed to their tax plan which is reducing those taxes and we do have a more competitive environment on taxes and Australia, like any other economy that is competing for capital, can’t afford to get stranded. Now, I think businesses in Australia know very clearly what the Government’s position is. The Parliament is finally considering those measures over the next few weeks before it rises at the end of March. Our view is, this is my mission, I want to see Australians earn more, I want to see Australian businesses earn more because that is what lifts standards of living. Ultimately, that is what supports the Government in building the Budget back to balance and providing another generation of prosperity. As you know, we have just completed 25 years of consecutive economic growth, annually, we are on our way to 26 this year and by the end of the September quarter if we maintain that path that will be the longest running record of annual economic growth in recorded economic history. I would say it is one of Australia’s greatest economic achievements if we see that occur. More importantly, it is the great society and prosperous society that is built, which is the real outtake for Australians.

TAYLOR:

One final question for you, both the Reserve Bank of Australia and Reserve Bank of New Zealand Governors have said the biggest economic risk at the moment to both of those economies is Donald Trump and the protectionist policies coming out of the United States. We are out of time but in the quickest way that you can – do you agree with that?

TREASURER:

Bill English, who I was with last Friday, the New Zealand Prime Minister put it this way, he said, “you don’t make a lot of money selling things to yourself,” and I think he is right. Australia has always had that view. It is one of the reasons we have been the successful economy we have been over a long period of time. That investment from overseas, trade with overseas, and of course bringing the best and brightest in the world to our shores who come here and make a contribution. That has been the secret to our success for a very long time – long may it continue.

TAYLOR:

We were there as well in lovely Queenstown last Friday. Scott Morrison, thanks very much for chatting to us. We appreciate it. Scott Morrison the Treasurer of Australia.