Senator the Hon Mathias Cormann

FRANCINE LACQUA: This is Bloomberg Surveillance. I’m Francine Lacqua here in Davos. Now let’s get to another great interview. He is the Finance Minister of Australia. He is Mathias Cormann. Mr Cormann, thank you so much for joining us this year. 

MATHIAS CORMANN: Good to be here.

FRANCINE LACQUA: We are just a couple of hours away from Donald Trump being inaugurated. The forty-fifth President of the United States. What does that mean for trade around the world? Are you concerned about tariffs?

MATHIAS CORMANN: We are very much looking forward to working with the Trump Administration. Australia has a been a long standing, strong and reliable friend of the United States. That has been the case under governments of both political persuasions, both in Australia and in the US. We are very confident that the Trump Administration is going to be very focussed on making sure that America is as strong and as successful as possible. A strong and successful America is going to be good for the world, is going to be good for Australia. We look forward to doing lots of business with you.   

FRANCINE LACQUA: But Minister, this is the US-Australia relationship. The problem is that there is another relationship that you are very reliant on, which is the China-Australia relationship. What happens if there is a trade war between China and the US? You get in the middle of that, basically, the crossfire.

MATHIAS CORMANN:We don’t believe there will be a trade war. We don’t believe there should be a trade war. We do have a very strong relationship with the US. The United States is our largest destination for investment, it is our largest source of foreign investment. China is our largest trading partner. The US is our second largest trading partner. These are both two very important trading relationships. We look forward to them going from strength to strength in the years ahead, both of them. 

FRANCINE LACQUA: Alright, you are very optimistic. 

MATHIAS CORMANN: I am.

FRANCINE LACQUA: I haven’t heard that optimism from many people here in Davos. What kind of impact will his policies have on the Asia Pacific region? There must be a little bit of concern, even if we need to give him time to also understand his policy.

MATHIAS CORMANN: I think it is too early to tell. From our point of view we look forward to working with the Trump Administration, constructively. There is a range of areas where Australia has got a particular interest. We are very committed to the Trans Pacific Partnership for example. We are committed to proceeding with it. There will be conversations to be had in relation to this, not only with the US but also with the ten other countries other than Australia, that are part of that. We have got to give this time. We look forward to engaging positively and constructively. 

FRANCINE LACQUA: Okay, are you concerned about the level of the Aussie Dollar? It has rebounded some five per cent. This is one of the strongest performances. It must hurt your ability to get away from mining onto tourism and exports.

MATHIAS CORMANN: The value of the Australian Dollar is set by the market. It is not something that is controlled by the Government. That is a very important feature of our system. It is one of the economic stabilisers in our system. So it is what it is.

FRANCINE LACQUA: Talking about your surplus, so S&P warned back in December, that the half year Budget update, that it was remaining a little bit pessimistic about the Government’s forecast to return to surplus by 2020-21. Are you sticking to that target?

MATHIAS CORMANN: After the half yearly Budget update all three major ratings agencies confirmed Australia’s AAA credit rating. That's an important point. It is true that our projection is for a return to surplus in 2020-21. That is based on what we know today about economic settings and all of the policy decisions that are reflected in our Budget. We are committed to doing everything we can to ensure our Budget is in the strongest possible position.

FRANCINE LACQUA: But what are you doing to make the ratings agencies outlook a little bit more optimistic?

MATHIAS CORMANN: What the ratings agencies want to see is that we are implementing our plan. That is what they have said they want to see. That we can legislate the Budget improvement measures through our Parliament. Over the last three years we have made significant progress, in particular since the last election we have made significant progress, in legislating Budget improvement measures. I think that they will want to see that continue.

FRANCINE LACQUA: Minister, I was trying to actually go through the report this morning, S&P’s language is pointing almost to an imminent loss of the AAA credit rating. That could come as soon as May. Is that now inevitable?

MATHIAS CORMANN: It is a matter for the ratings agencies as to what they decide. What I would just say is that at every Budget and Budget update for some time now there has been a lot of speculation. What I would just say is that every time there has been speculation in the lead up, the ratings agencies have confirmed the AAA credit rating after Budgets and Budget updates have been delivered. From our point of view, we will do the best we can every day to put our Budget in the strongest possible position. It will be for others to comment and make judgements. It will be up to the ratings agencies to decide how they want to approach it.

FRANCINE LACQUA: How critical is that rating?

MATHIAS CORMANN: The rating is important. It is important in terms of the cost of borrowings in Australia. It is important generally for our economy. So we value our AAA credit rating. We certainly are focussed on doing what we can to ensure the Budget is in the right position so that we can preserve it.  

FRANCINE LACQUA: We have been speaking to a number of miners and investors in mining companies and there was a real turnaround in the last six to seven months. Do you believe that mining and commodity prices will continue going up? And what impact does that have of course, on your economy?

MATHIAS CORMANN: It is true that the global prices for our key commodity exports, iron ore and coal in particular, have recovered somewhat in recent times. What we also have to remember is that over the last decade we have had massive capital investment into the expansion of production volumes and export volumes when it comes to iron ore and coal. The combination of significant increases in production and export volumes and a recovery somewhat in prices is good news from an Australian point of view. But we are focussing on making sure that all other parts of the economy can be as competitive internationally as possible as well. 

FRANCINE LACQUA: How worried are you about the Australian economy? So for the first time you saw a contraction, 0.5 per cent in the third quarter. It was the first contraction for your economy in five years. 

MATHIAS CORMANN: It was very much weather related. If you look at it on an annual basis, our economy continues to grow. We are into our twenty-sixth year of continuous, uninterrupted growth. We are growing at about 1.8 per cent on an annual basis, which is slightly better than the OECD average. It is better than all but one of the G7 economies. Our unemployment rate is at 5.7 per cent, which is better than previously anticipated, is better than the OECD average. We are not taking anything for granted. We are focusing on doing everything we can to ensure we are in the best possible position to deal with challenges and to take advantage of opportunities. 

FRANCINE LACQUA: But do you think there will be another quarterly contraction this year?

MATHIAS CORMANN: We are not expecting it, but the future will tell what the economic performance is going to be in future quarters. 

FRANCINE LACQUA: Minister, this is the second year you are coming to Davos, is the mood this year because there are not many people from the Trump Administration, because people are concerned about populism, trade wars. Is the mood different to last year or is there a complacency?

MATHIAS CORMANN: With the transition happening in the United States it was very noticeable that there was a much smaller US presence in Davos this year. I thought it was a very good conference. I thought the speech by the President of China was quite historic. Listening to him promote the virtues of free markets and trade liberalisation and making the case against protectionism. I thought that was very compelling. I think it has been a good week. It is important that the world continues to engage with each other, that we continue to focus on how we can deliver the best possible outcomes for people around the world. This is a very good opportunity to do that.

FRANCINE LACQUA: Minister thanks so much for your time. The Australian Finance Minister, Mathias Cormann there.