2019 Country Focus: Australia
Established in February 2015, Prasidium is Australia’s largest independent specialist credit insurance broker. With offices and 11 staff members in Sydney, Melbourne, and Brisbane, we manage policies in every state of Australia along with New Zealand. We place in excess of $15m of trade credit insurance premiums which represent $4.35bn+ in annual trade. Prasidium is underpinned by its four partners – Mark Smith, Stuart Prendergast, Mark Browning, and Paul Daniele and with over 60 years combined trade credit insurance experience we offer a service model that separates us from the market and has helped us achieve significant growth. Prasidium is investing heavily in the Australian market and with our goal to become the 2nd largest specialist broker in the market.
Australian market overview
The activity has remained stable for the first half of 2019, remaining relatively close to Australia’s long-term average of 3%. The decline in mining investment has bottomed out and is slowly ramping up again, while the construction of public infrastructure will continue to contribute to growth. This should help to offset the sharp slowdown in real estate investment and housing construction activity, with house prices now clearly falling in most cities.
A decline in housing prices was brought about by tougher rules imposed by the Australian Prudential Regulation Authority (APRA), a slowdown in immigration, and weaker capital inflows from China. Risks are palpable in the financial sector, as 50% of bank credit is linked to residential property.
|GDP growth (%)||2.5||2.2||2.8||2.3|
|Inflation (yearly average, %)||1.3||1.9||2.1||2.3|
|Budget Balance (% GDP)||-2.6||-0.5||-1.0||-0.8|
|Current Account Balance (% GDP)||-2.6||-2.6||-2.8||-3.0|
|Public Debt (% GDP)||39.0||40.8||40.5||40.0|
Household debt levels remain very high, which should further drag on consumption. For this reason, retail trade will continue to perform poorly (record levels of bankruptcies). The sector is also subject to other headwinds, including increased competition from online retailers. This could lead to higher inflation, although the latter is expected to remain below RBA’s target (2-3%). As a result of this, and other contributing factors, the $AUD continues to decline – currently trading at USD$0.68, down from the mid-to-high $0.70’s in the First Quarter of 2019.
2018 was a politically volatile year, with former Prime Minister Malcolm Turnbull defeated during a second leadership spill in August 2018, paving the way for Scott Morrison to become the leader of the Liberal Party and new Prime Minister.
Following a Federal Election in June 2019, Mr. Morrison and his Coalition Government were returned to power, with political stability coupled with sound fiscal management being the key agendas. In an effort to stimulate growth the RBA delivered two successive reductions, with the cash rate now at a record low of just 1.00%.
Externally, Australia’s policy is to align itself economically more closely with the Asia-Pacific region (especially China) and Europe, with which it has signed trade agreements while maintaining preferential relations with the United States. The weakening Australian dollar has boosted Australia’s terms of trade. Mineral exports (gas, coal and iron ore) will also benefit from the completion of several LNG terminals, and fiscal stimulus in China, Australia’s largest export market.
The moderation in domestic consumption and real estate investment will put pressure on imports, leading to a wider trade surplus. The authorities are paying greater attention to Chinese investments in the country, given the sectors concerned, as well as to immigration, which is not considered to sufficiently benefit the economy.
- Proactive economic policy and exchange rate flexibility
- Geographic proximity to booming economies in Asia
- The attractive quality of life with immigration contributing to population growth
- A rich endowment of mineral resources
- Moderate levels of public debt
- High tourism potential
- Exposed to commodity price volatility (specifically in iron ore and coal)
- The economy remains dependent on Chinese demand
- Substantial household debt (185% of gross disposable income)
- Shortage of infrastructure relative to the country’s vast territory
- The disparity between federated states
The Credit Insurance Market
On the domestic credit insurance front, all 5 key insurer’s (QBE, Atradius, Euler Hermes, Coface & Tokio Marine) are seeing higher claims numbers, and are bracing for a continuation of higher than average claims activity in these turbulent times. Upward pressure on rates continues, especially where there has been average to poor performance by policyholders.
A more conservative approach to underwriting has been mandated since late 2018, with Insurer’s reviewing their exposures in an effort to mitigate risk and continue to deliver strong results in a weakening economy. There is also a clear focus on ‘vanilla’ pricing and structuring, with the entire market making it clear they are not looking to do anything ‘exciting’ in the calendar year 2019.