Economic Risks for Australia and the World

The Federal Budget & Australia

  • A key underlying risk to the recent budget is the sustainability of the government’s revenue base.
  • The capacity to raise revenue is undermined by one such trend of the composition of growth away from wages and towards corporate profits.
  • The government collects 41% of its revenue from personal income tax and is the largest contributor to government revenue. This can be compared with the average 24% tax across wealthy countries.
  • Maintaining the path to surplus which is expected to be achieved by 2021 will require a disciplined approach to expenditure.
  • The level of public debt will need to be monitored closely as well to ensure that Australia does not “fall behind with an unsustainable and uncompetitive tax system” – John Fraser. It was only in the last few weeks that ratings agency Standard and Poor’s affirmed Australia’s AAA credit rating in response to the Federal budget although it noted that the government’s strong budget condition continues to deteriorate due to numerous years of fiscal deficits.
Source: John Fraser, Secretary to the Australian Treasury

Global Outlook – Risks

  • North Korea’s nuclear aspirations and tensions with South Korea and US is currently the main geopolitical issue and incredibly problematic for the United States government due to lack of viable solutions.
  • China’s main risk would be a financial crisis and the collapse of the renminbi. These risks are low but it is expected that there will be a continued economic slowdown. This is unlikely to materially affect the US as they are in a trade deficit with China (imports > exports) and therefore don’t depend on them as much as other countries. By comparison, Australia is in a trade surplus with China (exports > imports).
  • Europe continues to be in a state of political instability, where Britain, Germany and Italy will be going to the polls in the next 12 months. A key risk would be the break-up of the Eurozone, with other nations following Britain’s example of voting to leave the EU. The probability of this happening is very low as these nations are anticipated to steer away from doing so until they see what will actually happen with the UK economy. For others in the EU, it is certainly not an option without adverse consequences. Countries looking to leave the EU will need to re-domicile their assets and liabilities into a currency that is likely to devalue and dramatically reduce the wealth of its citizens.
Source: Hamish Douglass – Chief Executive Officer and Chief Investment Officer, Magellan Financial Group
*Attended the Stockbrokers and Financial Advisers Association Conference (SAFAA) 2017

WWN #18 – The Not-So Super Saver Scheme

What’s been happening? The First Attempt

Labour Party’s First Home Saver Account (FHSA) was a 2007 election policy of the Australian Labour Party. It offered benefits such as a variable interest rate, a tax rate of 15% and tax-free withdrawal.

The scheme only lasted until 2014 when the Federal Government decided to abolish it due to the slow uptake by the public. The problem with the scheme was that in order to close the account and access the funds, you had abide by the cumbersome “four year rule” – deposit at least $1,000 every year into the account for at least four financial years. At the time, there was 47,400 accounts with an average balance of about $12,800 each. It was expected that more than 750,000 accounts would be opened but this was never realised.

What Now? Let’s Try Again

On Tuesday night, the 2017 Federal Budget was released and the First Home Super Saver Scheme (FHSSS) was announced. The scheme allows people to put away a maximum of $15,000 per year into their super before tax, up to a total of $30,000.

Contributions paid into super this way will be taxed at just 15% instead of the usual marginal income tax rates (e.g. 32.5% for someone earning over $37,000). Any returns generated on the funds while they are held in super will also be taxed at the low rate of 15%.

The potential tax saving is reduced if you earn more than $250,000 per year where the tax rate rises from 15% to 30%.Earnings can be withdrawn along with the contributions when home is purchased. The withdrawal will be taxed at the individual’s marginal tax rate less 30%. This measure is estimated to have a cost to revenue of $250 million to the government.

Mortgage Choice CEO John Flavell remains sceptical that this scheme will succeed based on past experiences of the similar FHSA scheme. The new scheme has some great incentives but its main failing is that it doesn’t allow home buyers to save a big enough deposit. The ever-rising prices in the nation’s capitals means that a $30,000 deposit is not going to enough. According to Superfund Partners director Mark Beveridge, the average person would only save about $2500 extra a year. If you are a couple and save the maximum amount over two years, the total benefit is still less than $10,000.

On the other hand, some prospective buyers have backed the idea on the basis that it was better than another suggestion to allow first home owners to directly draw out funds from their existing super for a deposit.

For an indication of the potential benefit of the FHSSS to you, the government has prepared a handy estimator – click here.

First Home Super Saver Scheme (FHSSS) – Key Facts
Maximum contribution amount $15,000/year reaching a total of $30,000
Maximum term Unrestricted
Contribution Tax Rate on Deposits and Related Earnings 15%
Effective Start Date (Contributions) July 1, 2017
Effective Start Date (Withdrawals) July 1, 2018
Withdrawal Tax Rate Marginal Income Tax Rate Less 30%


What’s Next?

The FHSSS appears to be one of many “crowd-pleasers” in the budget – politically friendly measures that are not particularly meaningful.

As noted earlier, initial feedback is critical of the new scheme’s success and the potential benefit in tax savings may not be significant enough to convince many prospective first home buyers to implement the scheme. It is also argued that putting more money into borrowers’ pockets without increasing supply will likely to add to home price pressures.

There is a great deal of uncertainty ahead as any changes outlined in the Federal Budget (including this measure) must be passed by both the House of Representatives which is controlled by the government and the Senate. This means that any proposed changes may not necessarily become law.

References:
https://www.domain.com.au/news/federal-budget-2017-sorry-firsthome-buyers-this-isnt-the-budget-you-were-hoping-for-20170509-1nxvdg/http://www.theherald.com.au/story/4653576/federal-budget-2017-five-housing-changes-to-know-about/?cs=3968https://www.commbank.com.au/guidance/economy/federal-budget-2017–affordable-housing-201705.htmlhttp://www.dailytelegraph.com.au/news/national/federal-budget/the-first-home-super-savers-scheme-wont-get-traction-industry-experts-say/news-story/01605e56fe59032e4c0a2204af98c241http://www.news.com.au/finance/superannuation/notsosuper-home-deposit-scheme-will-leave-average-aussie-just-2500-better-off/news-story/10883f75182084c0eddfe95cffce8a92

WWN #17 – Telstra: Big win in Mobile after a Big Loss

What’s Been Happening?

In the 2nd half of 2016, the Australian Competition and Consumer Commission (ACCC) asked for feedback on a discussion paper about declaring mobile services, which would force Telstra to let competitors’ customers onto its network in regional areas. The purpose behind the discussion paper was to determine if increased competition between telecommunication companies (telcos) could deliver better coverage to people across the country.

There were approximately 120 submissions made in response and most supported the status quo out of fear that Telstra’s coverage would shrink if it could not operate an exclusive network.

Telstra and Optus were opposed to the changes as both have been investing heavily in mobile infrastructure and argued that it was fundamentally at odds with the principle of “infrastructure competition”. On the other hand, Vodafone submitted hundreds of pages in favour of the declaration as it sought to bring an end to Telstra’s market dominance.

What Now?

The ACCC has released a draft decision today proposing that it will not declare a wholesale domestic mobile roaming service. In other words, it will not force Telstra and Optus to give other telcos access to use their infrastructure and roam on their network.

It has found that mobile roaming would not necessarily reduce Telstra’s retail mobile prices for users in regional, rural and remote areas and “could well result in overall higher prices if other service providers raise their retail prices to reflect the cost of roaming access prices, for example”. – Media Release by ACCC.

Telstra welcomed the draft decision with CEO Andrew Penn saying that it was the correct decision for the people of Australia as it would continue to encourage telecommunications investments and competition. Once the decision is confirmed, he said that the 4G coverage will be expanded to reach 99% of the population by later this year.

Vodafone issued a strongly worded statement to voice their disagreement with the decision, where “too many Australians will continue to be held hostage to Telstra” and was disappointed that a “scare campaign with no facts or substance has succeeded”.

The news has sent Telstra shares soaring by 4-5% to around $4.42 which was a much needed boost to its share price after falling by more than 7.5% in mid-April following its rival TPG’s announcement that it plans to build its own mobile network after having paid $AUD 1.26 billion for mobile spectrum.

Telstra Share Price 5th May.png

Credits: Yahoo Finance Charts, Telstra’s Share Price between April 12 and May 5 2017

 

What’s Next?

The ACCC has invited submissions on the draft decision until 2 June 2017 after which it is expected to hand down its final decision.

References:
http://www.smh.com.au/business/telstra-warns-of-untimely-end-to-mobile-coverage-race-if-roaming-is-declared-20161215-gtbme7.htmlhttp://www.abc.net.au/news/rural/2017-05-05/telstra-optus-let-off-providing-free-mobile-roaming-to-telcos/8499582http://www.smh.com.au/business/telstra-has-big-win-in-battle-for-bush-mobiles-20170504-gvywu2.html

 

WWN #13 – Deflating the Housing Bubble: APRA Announces New Mortgage Rules

500px Photo ID: 129251911 - Little paper house flying with some helium balloons.What’s been happening? 

In December 2014, the original round of macro-prudential policies were introduced by the Australian Prudential Regulatory Authority (APRA) amid concerns that the rise in lending was due to speculators. APRA aimed to limit investment lending growth to 10% through measures such as loan affordability tests which assess the borrowers’ ability to service their loans. In these tests, it was recommended that an interest rate buffer of minimum 2% above the loan product rate and a floor lending rate of 7% be incorporated. It doesn’t seem to have worked well however, as investors currently account for 50.2% of new home loans.

What Now?

In a move to tighten lending practices, APRA announced new macro-prudential regulations this Friday. Currently, interest-only loans account for 40% of total lending which is higher than levels last seen in 2008 (30%).

APRA’s new rules require banks to:

  • Limit the flow of interest-only lending to 30% of new mortgage lending for both investors and owner occupiers. Interest-only lending must have an LVR of above 80% and must ensure there is a strong scrutiny and justification for any instances of interest-only lending at an LVR of above 90%
  • Retain the current 10% growth cap on investor mortgage lending but must ensure that they remain “comfortably below” the benchmark.  The wording used provides considerable discretion to the regulator.

The magnitude of the changes was smaller than expected by analysts, including Bell Potter banking analyst TS Lim. The market was expecting the 10% cap on investment loans to be reduced.

APRA Chairman Wayne Byres also warned that there will be additional requirements imposed on banks when the proportion of new lending on interest-only terms exceeds 30% of total new mortgage lending.

What’s Next?

From the new rules, it appears that APRA is trying to improve the quality of mortgage lending rather than restricting supply too aggressively. However, credit growth will slow nonetheless, especially in investment lending and interest-only home loans. Investment lending growth is currently above 10% and repayments are slow so lending to investors will need to slow considerably before the 10% cap can be attained.

For two of the big banks Commonwealth Bank and Westpac, they have double the number of interest only loans compared to their competitors ANZ and NAB which would mean that they are likely to have more difficulty in meeting the new requirements.

In a viewpoint that is implicitly shared by APRA, Treasurer Scott Morrison pointed out that it is no longer a question of housing affordability but “also an issue about household debt… and the need to make sure that it is well managed from a financial stability point of view”.  And so the housing bubble continues…

References:
http://www.afr.com/business/banking-and-finance/financial-services/apra-strengthens-macroprudential-rules-for-banks-20170330-gvaibnhttp://www.smh.com.au/business/banking-and-finance/apra-moves-to-tighten-mortgage-rules-20170330-gvaigd.htmlhttp://www.theage.com.au/business/banking-and-finance/anz-westpac-hike-rates-on-interestonly-loans-20170324-gv5i5x.html

WWN #12 – A win for Australia: China does a Backflip on E-Commerce Laws

What’s been happening?

The exponential increase in China’s cross-border e-commerce over the last few years led to Chinese authorities announcing new rules in April last year as they sought to improve regulation of the industry. There were two rules that raised alarm bells amongst Australian companies due to their potentially adverse effect on local brands that were favoured by Chinese consumers.

Rule #1 – E-Commerce Tax Circular

  • This rule significantly changed preferential tax policies that had been applied to cross-border e-commerce transactions. Under the new rules, overseas goods purchased by Chinese consumers are now subject to import duties and value added tax (VAT) which is expected to drive up prices. An import purchase limit of 2,000 RMB per transaction along with an annual tax-free limit of 20,000 RMB per individual was also introduced, which is likely to restrict consumer spending.

Rule #2 – The Positive List

  • A ‘positive’ list was released which included a total of 1142 commodity categories. The list covers food and beverages, clothing, footwear and other items that are commonly purchased by Chinese consumers on e-commerce platforms. If the commodity is not on the list, it will not be allowed to be imported into China. Some Australian milk and healthcare products were not allowed on this list.
April 12 2016 - New Ecommerce Laws for China.png

Credits: Yahoo Finance Charts (comparing BAL, A2M and BKL)

Following the announcement, the stock prices of  big Australian companies such as Bellamy’s, A2 Milk and Blackmores went into free-fall (Note: April 10th-12th).

What Now?

In a surprising turn of events this week, China decided to indefinitely delay the tough e-commerce laws. In a statement which effectively removes labelling and registration requirements, China’s Ministry of Commerce said that “low-value products imported for personal use through e-commerce would be considered as a separate category.” -Sydney Morning Herald

The backflip came ahead of Chinese Premier Li Keqiang arriving in Australia for negotiations on free trade agreements and eliminating non-tariff barriers between the two countries. Chief executives of A2 Milk and Blackmores both welcomed the updated regulations and saw it as an indication of China strengthening its commitment to promote the cross-border e-commerce channel.

Upon the news, previously affected companies recorded healthy gains with Blackmore shares rising by 13.3%, Bellamy’s up by 14.66% and A2 Milk was up 4.88% (Note: March 20th-21st).

Post-Announcement Reaction for China E-Commerce Laws.png

Credits: Yahoo Finance Charts (post-announcement reaction for BAL, A2m and BKL)

What’s Next?

Despite the increasingly protectionist economic stance taken by countries such as America and Britain, China and Australia appear intent on fighting for free trade which is viewed as mutually beneficial for both countries. It remains to be seen whether the new agreements which are expected to be signed during the Chinese Premier’s visit to Australia will actually reflect this.

Whilst the reversal of the e-commerce laws is definitely good news for most Australian companies, it could perhaps be only a temporary reprieve until the next time the Chinese government decides to change its mind. As Blackmores’ CEO Christine Holgate remarks wryly, “certainty is a fluid concept in China”.

References:
http://www.afr.com/business/retail/fmcg/china-backs-down-on-tough-new-ecommerce-laws-in-boost-for-aussie-exporters-20170320-gv28fe
http://www.abc.net.au/news/2017-03-22/blackmores-boss-christine-holgate-china-trade/8377216
http://www.smh.com.au/business/retail/china-wants-to-expand-ecommerce-trade-with-australia-20170321-gv2xed.html
http://www.chinalawinsight.com/2016/04/articles/corporate/new-challenges-in-china-cross-border-e-commerce/