Things Aren’t Looking Too Good for Australia’s Economy: How Might Singapore Companies Be Affected?

It’s not really a secret that the growth of China’s economy, is in fact, slowing down.

Earlier today, the Wall Street Journal reported that the Chinese government has just announced that it is lowering its economic growth target for this year to just 7% and that the Chinese should be prepared for this “new normal” of slower growth.

This brings me to Australia. Although the two nations are thousands of miles apart, there are some truths to a random comment I recently saw on an online news article that went: “When China sneezes, Australia will catch a cold.”

That’s because China is the largest destination for Australia’s exported natural resources. And with the slowdown in China’s economic growth, Australia’s economy has also shown signs that it’s shifting into a lower gear.

For instance, in the fourth quarter of 2014, the GDP of Australia only grew by 0.5%, a decrease from the 0.8% growth rate experienced in the same quarter a year ago.

Moreover, the country’s debt issue is starting to weigh down on its economy. Australia’s Treasurer Joe Hockey predicts that, if nothing is done right now, the country’s net debt might grow to almost A$5.6 trillion by 2055, which is more than 120% of Australia’s estimated GDP then.

With more debt comes higher interest payments, meaning a larger portion of the Australian government’s revenue has to go toward servicing the borrowings. This leaves lesser funds for spending that might strengthen the economy.

The situation’s exacerbated by how Australia is already overspending, with Hockey commenting that “Everyday our spending exceeds government revenue by more than A$100 million.”

All the situations I described above may or may not have weighed on the minds of Australian policy makers, but it’s a fact that the country’s latest Budget had seen the introduction of more austerity measures. With that, it is not unreasonable to expect even slower growth from Australia’s economy going forward.

And if that is the case, what does it mean for Singapore-based companies with large exposure to the continent down under?

Optus anyone?

Since its acquisition of Australian telco Optus in 2001, Singapore Telecommunication Limited (SGX: Z74) has counted Australia as its second largest market after Singapore.

Optus is currently the second largest telecommunications operator in Australia and serves more than 9.4 million customers there. Although it’s unlikely for people to cancel any or most of their telecommunications-related subscriptions during an economic downturn (meaning to say Optus has a defensive business), the growth prospects for Optus may not be as bright as before given the current circumstances.

Properties for you?

After its acquisition of Australand Property Group late last year, Frasers Centrepoint Ltd (SGX: TQ5) can now be considered as one of the largest property companies in Australia.

On the surface, it seems that Australand might indeed be affected if the slowdown in Australia’s economy leads to lower transactions in the property market. However, Australand also has a large investment portfolio that will continue to generate rental income for the company.

Moreover, there is a possibility for some of Australand’s properties to be spun-off into many of the REITs (real estate investment trusts) that are managed by Frasers Centrepoint; this can help unlock value and free up cash for the company. If Australand executes well, any potential negative impacts due to an economic slowdown might not be too dramatic.

In any case, Frasers Centrepoint had acquired Australand at a price 22% higher than its net tangible assets. Therefore, it will be interesting to observe how Australand performs in the future to see if Frasers Centrepoint had actually overpaid for the acquisition.

Foolish Summary

There are quite a number of companies in Singapore with businesses in Australia.

Thus, even if we are investing solely in Singapore-listed companies, it is important for us to understand and be aware of what is happening around the world.

Click here now if you would like your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter delivered straight to your inbox. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool's purpose is to help the world invest,better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Frasers Centrepoint Ltd.