By Peter Martin
AUSTRALIA faces a run on its currency, a deeper collapse in housing prices and a bank funding crisis to rival Europe's as it tries to come to grips with life after the mining boom, according to a report from a boutique US advisory firm.
Entitled Australia: The Unlucky Country, the report from Variant Perception argues that Australia faces a classic case of Dutch Disease, the erosion of capability that flows from a resources boom and an overvalued exchange rate.
Australian analysts dismissed many of Variant's conclusions as nothing new.
"The mining sector has crowded out almost all other sectors of the economy and also funnelled credit and liquidity into a housing bubble in the real estate sector," says the report, which has been circulated among global money managers.
The Australian dollar is overvalued on most metrics, one being the hamburger-based Big Mac Index, which has the Aussie 15 per cent to 20 per cent above par, Variant says. But it will need to fall well below par and stay there for some time for the rest of the economy to come to the fore after mining retreats.
"It will be almost impossible to move mining capacity to other sectors in Australia," the report says.
"This is a classic problem for economies who suffer from Dutch Disease. When the hangover arrives, writing off production capacity is often done at a considerable discount to cost.
''In addition, the manufacturing sector is under-developed and will not be able to take up the slack for the loss of momentum in construction and mining."
The report came as June construction figures released yesterday showed housing at its lowest in a decade, down 15 per cent from its peak two years ago. Non-residential building fell almost 20 per cent after the wind-up of the Building the Education Revolution program. Variant says the Aussie might slide smoothly as a result of the Reserve Bank cutting interest rates, or it could fall suddenly in a European-style crisis in which foreigners pull out of Australian banks and corporates.
"A total funding need from external sources of 40 per cent is extraordinarily high,'' the report says. "This increases the risk yet further should Australia face a funding shock, driven either by events at home (a severely slowing economy), or abroad (e.g., a euro-driven credit event). Australia's net external debt levels resemble those seen in the European periphery. Its net international investment position is deeply negative, worse than that of countries such as Turkey and Brazil."
Variant says the Reserve Bank will come to come to the rescue of the big four Australian banks in a crisis because they are too important to fail.
But Australian analysts dismissed many of Variant's conclusions as nothing new. "They've discovered the current account deficit," said one. "We discovered it in the 1980s and got on with our lives.'' Annette Beacher, the head of Asia-Pacific research with TD Securities, said the analysis was selective.
''There are scant fundamental grounds for comparing Europe with Australia,'' she said. ''Australian banks loosened their prudential standards on home loans only very briefly in 2006-07, and certainly learnt their lesson for the subsequent commodity boom.''
She noted that Australian banks were extremely profitable and now far less dependent on overseas markets for funding.
With TIM COLEBATCH