The squeeze on Australia is starting to gather momentum as higher global and local interest rates combine with the looming resource tax induced capital strike plus a China slow-down.
According to Westpac chief economist Bill Evans, borrowing spreads for Australian banks have increased by around 35 basis points to 125 basis points in the “popular” three-year maturity in the last month. That was before the resources tax.
About 50% of Australian bank funding comes from these overseas loans. The federal budget will help the credit rating of Australia but the decision to slash the vast investment boom that was headed the nation’s way will cause the rates to rise further because Australia is now unpredictable.
Because so much of the Australian overseas borrowing by the banks is spread over three years, it will take some time before the higher global rates flow through into Australian interest rates, but it will happen. Indeed BHP chief executive Marius Kloppers talking to Alan Kohler on Inside Business forecast that high world debt levels would curb global growth, confirming that BHP fears an era of higher interest rates.
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Kloppers annoyed Treasurer Wayne Swan by announcing that three BHP Australian expansion projects – WA iron ore, Queensland coal and Yeelirrie uranium “would now be very difficult to approve” in the light of the tax changes. But he did not abandon them.
When Kohler asked Kloppers about Olympic Dam, South Australian Premier Mike Rann must have been on the edge of his seat because the future of the state is based on that project. Kloppers said the new tax “does upset the apple cart a little bit”, but he said that it would was too early to mothball Olympic Dam.
According to Ivor Ries writing in The Eureka Report there are “270 major resource projects in Australia undergoing feasibility studies and financing with a total capital value of $320 billion. These projects would have employed somewhere around about 120,000 people during the construction phase”.
Ries adds: “The Resources Super Profits Tax has stopped them dead in their tracks. All of those projects are now frozen. There are probably about 20,000 engineers working on these projects and by the end of the month half of them will be unemployed.”
I think Ries is being a bit tough, but if we use the BHP ratio of three in deep trouble and one yet to be decided, we are still looking about 200 projects nationally being mothballed. And don’t under-estimate the effect of this on the morale of investors in Australia.
Ivor Ries is a stock broker with Baillieu and his sentiments reflect the horror that has spread across the local and global capital community at the severity of the tax and the fact that it is retrospective. At a time of global uncertainty, when commodity prices look as through they have peaked, do not underestimate the Rudd effect on Australian share prices, interest rates and the dollar. I don’t think Kevin Rudd and Wayne Swan fully understand the forces they have unleashed.
And our domestic mistakes comes as it is now clear that the Chinese efforts to slow its economy and its property speculation are working. This is actually a good thing, but there is always the risk that we will see the China slow-down overshoot.
Add that to a miserable time ahead for Europe and slow US growth and the short-term outlook for commodity prices is not that flash. Prices have been boosted by speculation and traders, and that can easily turn the other way.
You could not think of a worse time to introduce a tax that is not competitive with the rest of the world. No global miner will want to endorse the tax in a tough time for fear it will be spread. They will spend their cash elsewhere.
There is no problem with a super profits tax if it is constructed in the way similar to the petroleum resources tax, which was not levied on existing projects and which was not triggered until a net return of 15 per cent was achieved.
Rudd and Swan applied the new tax to existing projects and triggered the tax once a 6 per cent return is reached. A number of popular non-business journalists have been very badly briefed and have made fundamental errors saying the new tax is like the petroleum tax.
That means the public does not as yet understand the issues. When they understand that the tax will slash new mineral projects, and lift interest rates, there will be a backlash.
You could also argue that the tax is a money grab by NSW and Victoria for the wealth of WA, Queensland and to lesser extent South Australia. When the residents of those states understand this and see the large number of projects being mothballed, there will be a huge backlash, so Rudd must go to the polls as quickly as possible.
This article first appeared on Business Spectator.