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Country Report

October 2011

Australia

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Page 2 Map

Political Risk Services Australia Country ForecastReproduction without written permission of The PRS Group is strictly prohibited.

REV2003

Australia

NEW CALEDONIA

FIJIVANUATU

TUVALU

SOLOMONISLANDS

Timor Sea

Great Australian Bight

Arafura Sea

Gulf ofCarpentaria

C o r a l S e a

Alice Springs

Cairns

Mackay

Adelaide

Perth

Brisbane

Hobart

Melbourne

Sydney

Darwin

Canberra

q

q

q

q

q

q

q

q

q

q

q

q

q

Fremantle

Townsville

Papua NewGuinea

Indonesia

New Zealand

Devonport

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Highlights 28-Oct-2011 Page 3

Australia

Country Forecast

HighlightsMOST LIKELY REGIMES AND THEIR PROBABILITIES

18-Month: Minority ALP 45% (50%)

Five-Year: LP-NP Coalition 55% (45%)

FORECASTS OF RISK TO INTERNATIONAL BUSINESS

TurmoilFinancialTransfer

DirectInvestment

ExportMarket

18-Month: Low A+ A- AFive-Year: Low A- A A-( ) Indicates change in rating. * Indicates forecast of a new regime.

KEY ECONOMIC FORECASTS

YearsReal GDPGrowth % Inflation %

CurrentAccount ($bn)

2006-2010(AVG) 2.8 3.0 -44.83

2011(F) 1.8 3.5 -35.40

2012-2016(F) 2.9 2.8 -39.20

Gillard Flailing

Key Points To Watch

Prime Minister Julia Gillards minority ALP government is continuing to hang on to powerwith the backing of members of the Australia Greens and three independent lawmakers.However, the fragility of the governments parliamentary majority has forced Gillard tocede a substantial amount of influence over policy to her non-ALP partners, at the risk offurther eroding her already sagging popular support, which has left her vulnerable to achallenge from her predecessor as party leader, Foreign Minister Kevin Rudd

The government recently managed to secure approval of a controversial carbon-tax schemethat Gillard only pursued under pressure from the Greens, but passage of a bill that wouldimpose a 40% windfall profits tax on mining companies has been blocked by one of thegovernments independent backers. Gillard is counting on revenue from the mining tax tofund tax breaks for businesses, increase pension benefits, and finance improvements toregional infrastructure, all of which she hopes will boost her approval rating

The next election does not fall due until 2013, and the virtual certainty of a landslide victoryfor the Liberal-National opposition coalition in the event of a snap poll will probably ensurethe survival of the government for the time being. However, policy implementation will

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Page 4 28-Oct-2011 Highlights

remain erratic, and the oppositions pledge to abolish the carbon-tax plan if returned topower can only heighten the level of uncertainty, with negative consequences for investorconfidence

Government Change May Mean Policy Reversals

Just as he has pledged to repeal the Clean Energy program, Abbott has suggested that hewould consider abandoning the ALPs national broadband project as a means of restoringthe budget balance to surplus. Whether this is merely campaign-mode grandstanding is anopen question. The already high estimated cost of establishing the network is sure to rise,but the program is popular among members of the LP and especially the NP, whichrepresents a rural constituency

Otherwise, an LP-NP government coming to power in 2013 election will encourage foreigninvestment and pursue privatization in order to foster economic development, despiteopposition from trade unions, environmental groups, Aborigines, and, at times, the NP

If the LP-NP coalition is returned to government with a comfortable majority, theadministrations reform agenda will likely focus on reshaping federal-state relations. TheLP will probably focus the debate on deficiencies in water and energy policy, which evendefenders of states rights concede require national solutions. But the Liberals view thestate governments as an impediment to badly needed reforms, and may take advantage ofthe High Courts expansive interpretation of the corporations power to push for asweeping national reform program that includes the education and health systems,as well

The 2011/2012 budget unveiled in May 2011 projects a deficit equivalent to about 1.5% ofGDP, compared to an earlier anticipated shortfall nearly twice as big. Even moresignificant was the governments forecast of a surplus in 2012/2013, which is to be achievedthrough savings from reduced transfer payments to families and various adjustments to the

tax code as it affects spousal benefits and unemployed youth However, with economic growth forecast to come in well below the budget target in 2011,

the deficit is likely to be closer to 3% of GDP. The restoration of fiscal discipline cannot beput off indefinitely without risking an adverse reaction in the markets, and any governmentwill be expected to move in that direction over the middle of the forecast period

Assuming general economic conditions are sufficiently stable as to permit some easing offiscal constraints later in the forecast period, economic growth rates should accelerate to3%3.5, producing an average rate of growth of close to 3% per year through 2016. Thecentral bank will tighten monetary policy as necessary, and inflation is forecast to remainclose to the upper limit of the RBAs comfort zone over the entire forecast period, averaging2.8% per year through 2016.

Economic Forecasts for the Three Alternative Regimes

LP-NP Coalition ALP Divided Government

Growth

(%)Inflation

(%)CACC

($bn)Growth

(%)Inflation

(%)CACC

($bn)Growth

(%)Inflation

(%)CACC

($bn)

2011 1.8 3.5 -35.40 2.1 3.3 -33.90 1.9 3.2 -32.402012-2016 2.9 2.8 -39.20 3.0 2.6 -42.60 2.2 2.9 -37.40

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Current Data 1-Nov-2011 Page 5

Political Fact Sheet

CAPITAL:

Canberra

CONSTITUTION:

January 1, 1901

ADMINISTRATIVE SUBDIVISIONS:6 states and 2 territories

POPULATION:

2010: 21.51 million

AREA:7,682,300 sq. km.

OFFICIAL LANGUAGE:

English

STATUS OF PRESS:

free

SECTORS OF GOVERNMENT

PARTICIPATION:

transportation, communications, shipping,agriculture, utilities

CURRENCY EXCHANGE SYSTEM:free-floating

EXCHANGE RATE:

10/24/2011 $1=0.96 Australian dollars

ELECTIONS:

Senate members serve six-year terms; one-half elected every three years. House ofRepresentative members are elected for amaximum three-year term; last, August 21,2010; next, by August 2013.

HEAD OF STATE:

Queen Elizabeth II, represented by GovernorGeneral Quentin Bryce (2008)

HEAD OF GOVERNMENT:

Prime Minister Julia Gillard (2010)

OFFICIALS:

Wayne Swan, Deputy Prime Minister, Treasurer

Joseph Ludwig, AgricultureRobert McClelland, Attorney GeneralStephen Smith, DefenseTony Burke, EnvironmentPenny Wong, Finance & DeregulationKevin Rudd, Foreign AffairsNicola Roxon, HealthChris Bowen, Immigration & CitizenshipAnthony Albanese, Infrastructure & TransportKim Carr, Innovation, Industry & ScienceSimon Crean, Regional Australia, Regional

Development & Local GovernmentCraig Emerson, Trade

Martin Ferguson, Resources & Energy, Tourism

LEGISLATURE:

Bicameral Parliament; 76-member Senate and150-member House of Representatives. Seatdistribution in the Senate: Liberal and NationalParty Coalition (LP-NP), 36; Australian LaborParty (ALP), 32; Australian Greens, 5; other, 2;independent, 1. Seat distribution in the House:ALP, 83; LP-NP, 65; independent, 2.

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Australia

Databank

Reproduction without written permission of

The PRS Group is strictly prohibited.Political Risk Services1-Nov-2011

2001-2005

Average

2006-2010

Average 2001 2002 2003 2004 2005

Domestic Economic Indicators

GDP (Nominal, $bn) 545.85 996.64 368.11 425.57 540.30 658.07 737.18

Per Capita GDP ($) 27316 47220 18975 21658 27151 32659 36136

Real GDP Growth Rate (%) 3.2 2.8 2.1 4.2 3.1 3.7 3.1

Inflation Rate (%) 3.0 3.0 4.4 3.0 2.8 2.3 2.7

Capital Investment ($bn) 141.22 280.55 80.91 106.80 141.52 174.32 202.53Capital Investment/GDP (%) 25.5 28.2 22.0 25.1 26.2 26.5 27.5

Budget Revenues ($bn) 133.90 231.53 94.67 101.89 132.69 160.13 180.14

Budget Revenues/GDP (%) 24.6 23.4 25.7 23.9 24.6 24.3 24.4

Budget Expenditures ($bn) 129.20 235.72 91.58 102.47 127.91 154.25 169.78

Budget Expenditures/GDP (%) 23.8 23.6 24.9 24.1 23.7 23.4 23.0

Budget Balance ($bn) 4.71 -4.20 3.09 -0.58 4.78 5.88 10.36

Budget Balance/GDP (%) 0.8 -0.2 0.8 -0.1 0.9 0.9 1.4

Money Supply (M1, $bn) 107.11 199.61 86.50 81.02 104.37 124.15 139.51

Change in Real Wages (%) 5.0 4.7 4.9 5.1 5.6 3.8 5.5

Unemployment Rate (%) 5.9 4.9 6.7 6.3 5.9 5.4 5.1

International Economic IndicatorsForeign Direct Investment ($bn) 6.90 34.52 8.26 16.99 8.02 36.83 -35.60

Forex Reserves ($bn) 27.98 34.54 16.43 18.62 29.97 33.90 40.97

Gross Reserves (ex gold, $bn) 29.72 37.30 17.96 20.69 32.19 35.80 41.94

Gold Reserves ($bn) 1.02 2.48 0.71 0.88 1.07 1.12 1.32

Gross reserves (inc gold, $bn) 30.74 39.78 18.67 21.57 33.26 36.92 43.26

Total Foreign Debt ($bn) 392.00 880.25 251.36 293.71 366.17 479.27 569.49

Total Foreign Debt/GDP (%) 71.0 88.2 68.3 69.0 67.8 72.8 77.3

Debt Service ($bn) 12.21 33.68 10.05 10.03 10.54 12.91 17.52

Debt Service/XGS (%) 10.4 13.8 10.9 10.5 9.8 9.7 11.1

Current Account ($bn) -26.36 -44.64 -7.41 -15.81 -28.68 -38.85 -41.03

Current Account/GDP (%) -4.5 -4.6 -2.0 -3.7 -5.3 -5.9 -5.6

Current Account/XGS (%) -21.3 -19.2 -8.0 -16.6 -26.7 -29.2 -26.0

Exports ($bn) 78.67 164.81 63.63 65.01 70.52 87.16 107.01

Imports ($bn) 88.78 168.47 61.89 70.53 85.86 105.23 120.38

Trade Balance ($bn) -10.11 -3.67 1.74 -5.52 -15.34 -18.07 -13.37

Exports of Services ($bn ) 24.19 41.78 18.09 19.59 23.75 28.49 31.05Income, credit ($bn) 11.59 31.65 8.20 8.52 10.49 14.31 16.45

Transfers, credit ($bn) 2.77 4.73 2.30 2.37 2.74 3.11 3.33

Exports G&S ($bn) 117.22 242.97 92.22 95.49 107.50 133.07 157.84

Liabilities ($bn) 0.58 8.32 0.05 0.69 0.68 0.79 0.70

Net Reserves ($bn) 30.15 31.46 18.62 20.88 32.58 36.13 42.56

Liquidity (months import cover) 4.0 2.4 3.6 3.6 4.6 4.1 4.2

Currency Exchange Rate 1.597 1.217 1.932 1.841 1.542 1.360 1.310

Currency Change (%) 4.8 3.3 -12.5 4.7 16.2 11.8 3.7

Social Indicators

Population (million) 19.90 21.07 19.40 19.65 19.90 20.15 20.40

Population Growth (%) 1.3 1.1 1.4 1.3 1.3 1.3 1.2

Infant Deaths/1000 5 5 5 5 5 5 5

Persons under Age 15 (%) 21 19 21 21 21 20 20Urban Population (%) 91 89 90 90 90 91 92

Urban Growth (%) 2.0 0.4 2.5 1.3 1.3 2.4 2.3

Literacy % pop. 92 94 92 92 92 93 93

Agricultural Work Force (%) 5 4 5 5 5 5 5

Industry-Commerce Work Force (%) 22 22 22 22 22 22 22Services Work Force (%) 73 74 73 73 73 73 73

Unionized Work Force (%) 28 28 28 28 28 28 28

Energy - total consumption (1015 Btu) 5.20 5.71 5.02 5.13 5.13 5.29 5.42

Ener - consum tion/head (109 Btu) 0.26 0.27 0.26 0.26 0.26 0.26 0.27

Current Data 1-Nov-2011 ~ Page 6-7

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Australia

Databank

Reproduction without written permission of

The PRS Group is strictly prohibited.Political Risk Services1-Nov-2011

2001-2005

Average

2006-2010

Average

Domestic Economic Indicators

GDP (Nominal, $bn) 545.85 996.64

Per Capita GDP ($) 27316 47220

Real GDP Growth Rate (%) 3.2 2.8

Inflation Rate (%) 3.0 3.0

Capital Investment ($bn) 141.22 280.55Capital Investment/GDP (%) 25.5 28.2

Budget Revenues ($bn) 133.90 231.53

Budget Revenues/GDP (%) 24.6 23.4

Budget Expenditures ($bn) 129.20 235.72

Budget Expenditures/GDP (%) 23.8 23.6

Budget Balance ($bn) 4.71 -4.20

Budget Balance/GDP (%) 0.8 -0.2

Money Supply (M1, $bn) 107.11 199.61

Change in Real Wages (%) 5.0 4.7

Unemployment Rate (%) 5.9 4.9

International Economic IndicatorsForeign Direct Investment ($bn) 6.90 34.52

Forex Reserves ($bn) 27.98 34.54

Gross Reserves (ex gold, $bn) 29.72 37.30

Gold Reserves ($bn) 1.02 2.48

Gross reserves (inc gold, $bn) 30.74 39.78

Total Foreign Debt ($bn) 392.00 880.25

Total Foreign Debt/GDP (%) 71.0 88.2

Debt Service ($bn) 12.21 33.68

Debt Service/XGS (%) 10.4 13.8

Current Account ($bn) -26.36 -44.64

Current Account/GDP (%) -4.5 -4.6

Current Account/XGS (%) -21.3 -19.2

Exports ($bn) 78.67 164.81

Imports ($bn) 88.78 168.47

Trade Balance ($bn) -10.11 -3.67

Exports of Services ($bn ) 24.19 41.78Income, credit ($bn) 11.59 31.65

Transfers, credit ($bn) 2.77 4.73

Exports G&S ($bn) 117.22 242.97

Liabilities ($bn) 0.58 8.32

Net Reserves ($bn) 30.15 31.46

Liquidity (months import cover) 4.0 2.4

Currency Exchange Rate 1.597 1.217

Currency Change (%) 4.8 3.3

Social Indicators

Population (million) 19.90 21.07

Population Growth (%) 1.3 1.1

Infant Deaths/1000 5 5

Persons under Age 15 (%) 21 19Urban Population (%) 91 89

Urban Growth (%) 2.0 0.4

Literacy % pop. 92 94

Agricultural Work Force (%) 5 4

Industry-Commerce Work Force (%) 22 22Services Work Force (%) 73 74

Unionized Work Force (%) 28 28

Energy - total consumption (1015 Btu) 5.20 5.71

Ener - consum tion/head (109 Btu) 0.26 0.27

2006 2007 2008 2009 2010

783.97 951.62 1040.86 973.82 1232.94

38001 45641 49400 45741 57319

2.6 4.6 2.6 1.4 2.7

3.5 2.3 4.4 1.8 2.8

216.96 273.24 303.38 272.54 336.6527.7 28.7 29.2 28.0 27.3

192.69 226.36 244.59 225.40 268.59

24.6 23.8 23.5 23.2 21.8

180.83 211.98 228.06 246.52 311.23

23.1 22.3 21.9 25.3 25.2

11.86 14.38 16.53 -21.12 -42.64

1.5 1.5 1.6 -2.2 -3.5

155.69 193.58 203.51 196.31 248.97

3.8 4.6 4.1 5.9 4.9

4.8 4.4 4.3 5.6 5.2

26.42 41.08 47.28 27.25 30.58

52.82 24.24 29.87 33.00 32.79

53.45 24.77 30.69 38.95 38.66

1.63 2.14 2.23 2.79 3.61

55.08 26.91 32.92 41.74 42.27

662.26 807.03 972.48 905.22 1054.27

84.5 84.8 93.4 93.0 85.5

20.73 31.24 36.44 38.08 41.92

11.3 14.2 13.2 16.6 13.7

-41.50 -58.03 -47.79 -43.89 -31.99

-5.3 -6.1 -4.6 -4.5 -2.6

-22.6 -26.4 -17.3 -19.1 -10.5

124.91 142.42 189.06 154.79 212.85

134.51 160.21 193.97 159.00 194.67

-9.60 -17.79 -4.91 -4.21 18.18

33.09 40.50 45.24 41.59 48.4921.75 32.66 37.32 27.92 38.59

3.70 4.40 4.43 5.07 6.06

183.45 219.98 276.05 229.37 305.99

0.81 1.09 30.45 4.58 4.69

54.27 25.82 2.47 37.16 37.58

4.8 1.9 0.2 2.8 2.3

1.328 1.195 1.192 1.282 1.090

-1.4 10.0 0.3 -7.6 15.0

20.63 20.85 21.07 21.29 21.51

1.1 1.1 1.1 1.0 1.0

5 5 5 5 5

20 19 19 19 1892 88 88 88 89

1.1 -3.3 1.1 1.0 2.1

93 93 93 93 99

4 4 4 4 4

26 21 21 21 2170 75 75 75 75

28 28 28 28 28

5.45 5.56 5.75 5.86 5.94

0.26 0.27 0.27 0.28 0.28

Current Data 1-Nov-2011 ~ Page 6-7

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AustraliaCountry Forecast28-Oct-2011 Comparison: Australia

Page 8 28-Oct-2011 Current DataReproduction without written permission of The PRS Group is strictly prohibited

Regional Real GDP Growth (2010): East Asia/Pacific

0 2 4 6 8 10 12 14 16

New Zealand

Australia

Myanmar

Japan

Indonesia

South Korea

Hong Kong

Vietnam

Papua New Guinea

Malaysia

Philippines

Thailand

China

Taiwan

Singapore

(percent)

Regional Inflation Rates (2010): East Asia/Pacific

-2.0 0.0 2.0 4.0 6.0 8.0 10.0

Japan

Taiwan

Malaysia

New Zealand

Hong Kong

Australia

Singapore

South Korea

Thailand

China

Philippines

Indonesia

Papua New Guinea

Myanmar

Vietnam

(percent)

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Australia Country Forecast28-Oct-2011 Comparison: Australia

Current Data 28-Oct-2011 Page 9Reproduction without written permission of The PRS Group is strictly prohibited

Regional Current Account/GDP (2010): East Asia/Pacific

-10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0

New Zealand

Vietnam

Australia

Myanmar

Indonesia

South Korea

Japan

Philippines

Thailand

China

Hong Kong

Papua New Guinea

Taiwan

Malaysia

Singapore

(percent)

Economic Performance Profile

Country's Ranking Relative to All Countries

Covered by Political Risk Services

2006-2010

47224

2.8

3.0

4.9

28.2

-0.2

-4.6

13.8

3.3

BEST 25% NEXT 25% NEXT 25%

GDP Per Capita ($)

Real GDP Growth (%)

Inflation (%)

Unemployment (%)

Capital Investment

(% of GDP)

Budget Balance

(% of GDP)

Current Account

(% of GDP)

Debt Service Ratio

Currency Change (%)

WORST 25%

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Page 10 1-Nov-2011 Current Data

Social Indicators as of 2010Primary Energy

Energy Consumption (1015

Btu): 5.94

Per Capita Consumption (109

Btu): 0.28

Population

Annual Growth 1.0%

Infant Deaths per 1,000 5

Persons Under Age 15 18%

Urban Population 89%

Urban Growth 2.1%

Literacy 99%

Work Force Distribution

Agriculture 4%

Industry-Commerce 21%

Services 75%Unions 28%

Ethnic Groups

white (92%), Asian (7%), aboriginal and other (1%)

Languages

English, aboriginal languages

Religions

Roman Catholic (26%), Anglican (21%), other Christian (21%), other (32%)

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Political Risk Services

28-Oct-2011 Reproduction without written permission of The PRS Group is strictly prohibited.

Comment & Analysis 28-Oct-2011 Page 11

AustraliaCountry ForecastComment & Analysis

Gillard Flailing

Prime Minister Julia Gillards minority Australia Labor Party (ALP) government iscontinuing to hang on to power with the backing of members of the Australian Greensand three independent lawmakers. However, the fragility of the governmentsparliamentary majority has forced Gillard to cede a substantial amount of influence overpolicy to her non-ALP partners, at the risk of further eroding her already sagging popularsupport, which has left her vulnerable to a leadership challenge from the man shereplaced at the helm of the ALP, Foreign Minister Kevin Rudd.

The government recently managed to secure approval of a controversial carbon-reductionscheme that Gillard only pursued under pressure from the Greens, but passage of a billthat would impose a 30% windfall profits tax on mining companies has been blocked byone of the governments independent backers. Gillard is counting on revenue from themining tax to fund tax breaks for businesses, increase pension benefits, and financeimprovements to regional infrastructure, all of which she hopes will boost her approvalrating.

The next election does not fall due until 2013, and the virtual certainty of a landslidevictory for the Liberal-National opposition coalition in the event of a snap poll willprobably ensure the survival of the government for the time being. However, policyimplementation will remain erratic, and the oppositions pledge to abolish the carbon-taxplan if returned to power can only heighten the level of uncertainty, with negativeconsequences for investor confidence.

Carbon-reduction Plan Narrowly Approved

The recently approved Clean Energy Bill, one of 18 pieces of legislation comprising the

governments Clean Energy Future Plan, introduces a carbon-price mechanism (CPM)that is the centerpiece of a program to reduce carbon emissions by 5% of the 2000 figureby 2020. In the initial phase of the scheme, the countrys biggest emitters will be charged$22.50 per ton from July 2012 to July 2013, and by an additional 2.5% in each of the nexttwo years. Beginning in July 2015, a flexible rate will be introduced.

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Page 12 28-Oct-2011 Comment & Analysis

The second phase focuses on establishing a cap-and-trade system, under which permitswill be issued and regulated as a financial instrument. The number of permits issued willbe determined by a five-year carbon-reduction target, and will decrease at each five-year

interval.

The restrictions will not apply to fuels for household transportation. Industries that useconsiderable amounts of fuel (such as airlines) will be allowed to opt-in to the CPM, butotherwise will see a reduction in fuel tax credits and increases to in the fuel excise tax.

The use of a flat rate for the CPM in the early stages is designed to allow businessesaffected by the rules and their customers to anticipate the cost increases that will bepassed along the chain of production and distribution. The government plans to usesome of the revenue generated to offset the higher costs to households and some

businesses with tax breaks. In addition, some industries, such as coal mining and electricpower generation, will be offered compensation and/or loan packages.

Despite this, the plan is very controversial. Lobbyists for the coal industry argue that theCPM will make it difficult for companies to attract additional investment (80% of thecountrys electricity is generated from coal and the industry), and retailers have warnedthat higher costs will dampen consumer spending.

Not surprisingly, the scheme has been assailed by the opposition coalition of the LiberalParty (LP) and the National Party (NP), and public sentiment toward the plan is generally

less-than-favorable. LP leader Tony Abbott has said he would repeal the package shouldhe become the next prime minister, ensuring that the CPM will be a central issue in thenext election campaign.

Gillard and the ALP can ill-afford to invite controversy, as the partys popular supporthas slumped badly since last years federal election, and Gillard is lagging far behindAbbott in polls of voter preferences for prime minister. Rudds failure to steer a similarscheme through the Senate contributed to the steep fall in his popularity that left himvulnerable to a challenge from Gillard. For that reason, Gillard tried to steer clear of theissue, but was forced to take action under pressure from the Greens.

Assuming the legislative package wins approval in the Senate, which is scheduled to holda vote in early November, Gillard will be able to claim a political victory. However,opponents of the plan will undoubtedly wage a media campaign against the schemeduring the next election campaign, and unless Gillard somehow manages to sway publicopinion on the issue, her success at securing passage of the Clean Energy Bill may verywell be a factor behind her defeat.

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Comment & Analysis 28-Oct-2011 Page 13

Scandal Poses Threat to Majority

Perhaps the biggest immediate threat to the survival of Gillards government is a scandalinvolving Craig Thomson, an ALP lawmaker and the former national secretary of theHealth Services Union (HSU). Thomson is alleged to have used a union credit card topay for prostitutes and to withdraw nearly $1,000 in cash.

Thomson insists that he has done nothing wrong, but the opposition is pressing hard foran independent investigation, and has accused Fair Work Australia, the governmentagency responsible for monitoring industrial relations, of covering up for the formerunion boss. The opposition parties appear to be intent on keeping the scandal in thepublic mind, possibly hoping that Thomson will resign. At present, there is no indicationthat he intends to vacate his seat, but were he to do so, a by-election would almostcertainly result in the ALPs loss of the seat, and with it the governments majority.

Economic Outlook Turns Cloudy

The economy contracted by 1.2% (quarter-on-quarter) in the JanuaryMarch 2011 period,but staged a recovery in the second quarter, growing by a seasonally adjusted 1.2% on theback of inventory rebuilding and stronger household consumption. Year-on-year growthaccelerated to 1.4% in the second quarter, resulting in a half-year growth rate of 1.2%.

It is unclear whether inventory rebuilding was motivated by expectations of futuregrowth or simply lackluster demand, alternatives that have very different connotationsfor the likelihood that the phenomenon will continue. In any case, consumer confidencehas been drifting lower of late, largely on fears that slowing global growth and weakerdemand from China will have a negative impact on the domestic economy.

The mining sector will put in a stronger performance in the second half of the year, as thedisruptions caused by flooding recede. Nevertheless, annual real GDP growth is forecastto remain below 2% in 2011.

Inflation crept up to an annualized rate of 3.6% in the second quarter, fueled by higherfuel prices and a weather-related increase in food costs. Inflationary pressures should

ease as food production increases in those areas of the country not affected by the floodsearlier this year, a factor that in combination with a gloomy external outlook mayencourage the Reserve Bank of Australia to cautiously loosen monetary policy. In anycase, interest rates will not be increased from the current 4.75% until clear signs of ameaningful recovery are evident, and inflation is forecast to average 3.5% this year.

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Page 14 28-Oct-2011 Comment & Analysis

The national statistics office reported that the current-account deficit narrowed to$7.2 billion in the second quarter of 2011, after recording a shortfall of $10.9 billion in thefirst quarter, with a larger trade surplus (despite weaker-than-expected coal exports) and

a smaller primary income account deficit accounting for the improvement. Exports willreceive a boost from increased mining output, although demand for coal products willremain fairly sluggish as concerns about the health of the global economy mount, butdebt-servicing costs will keep the income balance in deficit and the services shortfall willremain large. On balance, the current account deficit is forecast to widen to $35.4 billionin 2011, roughly equivalent to the 2010 deficit as a percentage of GDP.

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Political Risk Services28-Oct-2011 Reproduction without written permission of The PRS Group is strictly prohibited.

Forecast Scenarios 28-Oct-2011 Page 15

AustraliaCountry ForecastForecast Scenarios

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIESMinority ALP45%

LP-NP Coalition40%

DividedGovernment 15%

SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIES LP-NP Coalition55%ALP35%


Most Likely Regime Scenario

18-Month Forecast Period:Minority ALP (45% Probability)Five-Year Forecast Period:LP-NP Coalition (55% Probability)

A closely fought general election held in August 2010 produced Australias first hungParliament since 1940, as both the incumbent Australian Labor Party (ALP) and theopposition coalition of the Liberal Party (LP) the National Party (NP) won a total of72 seats, four short of a majority in the 150-member lower house. However, Julia Gillard,who replaced Kevin Rudd as ALP leader and prime minister in June 2010, obtainedparliamentary confirmation of a minority government that will depend on the backing ofthe lone representative of the Australian Greens and three independent lawmakers onconfidence and budget votes.

The effectiveness of Gillards minority government, to say nothing of its ability to survivefor a full three-year term, will be determined to a great degree by the actions of TonyWindsor and Rob Oakeshott, two of the independent lawmakers who have pledged theirsupport to the ALP. Both are former members of the NP, describe themselves aseconomic conservatives, and represent largely rural districts in the state of New SouthWales. Gillard wooed them by promising roughly $9 billion in new investment for ruralschools and hospitals, as well as another $140 million of financial assistance to producersof ethanol over the next 10 years, but it was the ALPs proposal to establish a nationwide

LP-NPCoalition

Growth(%)

Inflation(%)

CACC($bn)

2011 1.8 3.5 -35.40

2012-2016 2.9 2.8 -39.20

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Page 16 28-Oct-2011 Forecast Scenarios

broadband network, which promises to bring improved and lower-cost Internet andtelephone access to rural Australia, that gave Gillard the edge over LP leader TonyAbbott in the post-election courtship of the independents.

The main question going forward is whether the governments bare majority is sufficientto ensure implementation of the ALPs agenda. The fragility of the governmentsparliamentary majority has forced Gillard to cede a substantial amount of influence overpolicy to her non-ALP partners. The government recently managed to secure approval ofa carbon-reduction scheme that Gillard only pursued under pressure from the Greens,but given the controversy surrounding the plan, her legislative success may very wellresult in a further erosion of her already sagging popular support, leaving her vulnerableto a leadership challenge from Rudd, who is now the minister of foreign affairs.

Gillard is counting on revenue from a proposed 30% tax on windfall mining profits tofinance tax breaks for businesses, increase pension benefits, and finance improvements toregional infrastructure, all of which she hopes will boost her approval rating. However,the measure is being blocked by one of the governments independent backers.

The next election does not fall due until 2013, and the virtual certainty of a landslidevictory for the LP-NP opposition coalition in the event of a snap poll will probably ensurethe survival of the government for the time being. However, the sizeable edge for the LP-NP alliance even in head-to-head polls suggests that the ALP will go down to defeat evenif a general election is held beyond the end of the 18-month forecast period. Abbott has

pledged to repeal the carbon-reduction legislation if elected to government, a positionthat is certain to win him the strong backing of the business community, and will likelyappeal to average voters who will face higher prices for a broad array of goods andservices once the carbon-price mechanism goes into effect in July 2012.

Change in Government Carries Risk of Policy Reversals

During its tenure in government during the 1980s and the 1990s, the ALP was responsiblefor the implementation of important liberal reforms, and upon leading his party back intopower in 2007, former Prime Minister Rudd committed his government to ensuring long-term economic health by creating an inviting climate for business. In general, any ALP

government will support measures aimed at improving competitiveness and increasingproductivity, including further business deregulation, public-sector cost cutting, and taxbreaks for the wealthy.

At least rhetorically, Prime Minister Gillard has not deviated significantly from thegeneral policy program outlined by Rudd, who promised to practice fiscal discipline, butstated that a fair apportionment of the benefits of economic growth, quality public

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services, equal opportunities in education and employment, and a strong social safety netare essential to establishing and maintaining a national consensus behind economicreforms. However, the constraints on her ability to implement that agenda have become

apparent.

Gillard has already passed her biggest legislative test, securing passage of bills requiredto introduce greater competition in the telecommunications industry, which is crucial tothe minority administrations plan to establish a national broadband network (NBN) by2021. Under a deal reached in June 2010, Telstra, the former state-ownedtelecommunications company that controls the countrys copper and cable infrastructure,agreed to share its network with NBN Company (NBNCo), a government-run entity thatwill be responsible for constructing the NBNs fiber-optic system. In addition to payingTelstra $11.7 billion to transfer its Internet customers to the new system, the ALP also

agreed to remove provisions of the telecommunications law that would bar Telstra fromacquiring any new mobile spectrum and would require the company to surrender itshalf-share in the dominant pay television provider, Foxtel.

The competition law and a companion bill regarding the regulation of NBNCo wereapproved by both parliamentary chambers in late March 2011, but the deal still requiredthe backing of Telstras shareholders, which did not occur until mid-October. NBNCo isto create a fiber-to-the-premises (FTTP) network that will connect 93% of homes,businesses, and state agencies, with the remaining (mostly rural) users gaining access bywireless and other technologies.

Just as he has pledged to repeal the Clean Energy program, Abbott has suggested that hewould consider abandoning the NBN as a means of restoring the budget balance tosurplus. Whether this is merely campaign-mode grandstanding is an open question. Thealready high estimated cost of establishing the network is sure to rise, but the program ispopular among members of the LP and especially the NP, which appeals to a ruralconstituency.

Otherwise, an LP-NP government coming to power after the 2013 election will encourageforeign investment and pursue privatization in order to foster economic development,despite opposition from trade unions, environmental groups, Aborigines, and, at times,the NP.

If the LP-NP coalition is returned to government with a comfortable majority, theadministrations reform agenda will likely focus on reshaping federal-state relations. In apotentially landmark decision in November 2006, the High Court ruled that thegovernments assertion of its corporations power to establish a national industrial

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relations system under the WorkChoices program was constitutional. The ruling hasopened the door to using the corporations power to assert federal authority in a broadrange of other areas, creating the potential for the development of national policies aimed

at improving the business climate and promoting economic development.

The LP will avoid a frontal assault on state prerogatives, and early on will probably focusthe debate on deficiencies in water and energy policy, which even defenders of statesrights concede require national solutions. That said, the Liberals view the stategovernmentsall of which are currently controlled by the ALPas an impediment tobadly needed reforms, and the Liberals may take advantage of the High Courts ruling topush for a sweeping national reform program that includes the education and healthsystems, as well.

Sizeable current account deficits have increased the vulnerability of the currency tounsettled conditions in the global financial markets, but the stability of the Australiandollar against the US currency throughout the tumult in 20082009 underscores howlimited are the risks on this score. In general, ample foreign exchange reserves make ithighly unlikely that the government will confront circumstances that might encourageany tightening of restrictions on repatriation or foreign exchange controls.

Cautious Approach to Trade Deals

The ALP supports free trade in principle, but while in opposition, the party conditionedits backing for trade agreements on clear evidence that deals would benefit Australians

generally. Like the LP-NP coalition, the ALP promotes enhanced competitiveness aspreferable to the use of protective tariffs for local industry. Tariffs have been reduced to amaximum of 5% for all goods except passenger motor vehicles, textiles, clothing, andfootwear.

A Labor government will focus its free-trade efforts on the Asia-Pacific region, pursuingdeals with Japan, China, Malaysia, and (jointly with New Zealand) the Association ofSoutheast Asian Nations (ASEAN). Preparations for the initiation of free-tradenegotiations with South Korea, India, and Indonesia are currently under way.

The government is also seeking to expand Australias trade opportunities in the MiddleEast, where it is negotiating a trade agreement with the six-nation Gulf CooperationCouncil (GCC), and the ALP administration has joined the US, Peru Chile, and Vietnamin an effort to expand the so-called Pacific-4 grouping into a trans-Pacific free-trade areaencompassing the member nations of the Asia-Pacific Economic Cooperation (APEC)bloc.

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Negotiations with China, which commenced in mid-2005, will continue to proceedslowly, with Beijings refusal to make concessions on agricultural imports posing asignificant obstacle to closing a deal. The ALPs proposed tax on windfall mining profits

may also be an impediment to concluding an agreement with China. Likewise, theconclusion of an FTA with Japan will likely be delayed by the Japanese governmentsresistance to easing protection for rural producers. The obstacles in that regard haveincreased following a mid-2010 government reshuffle in Tokyo that saw the appointmentof a staunch protectionist as the new minister of agriculture and fisheries.

In late 2010, the Productivity Commission delivered a report on a year-long investigationof the economic impact of the countrys FTAs. In unequivocal terms, the commissionstated that there was no evidence to suggest that the agreements had producedsubstantial commercial benefits, while complex rules-of-origin create an added cost

estimated at 8% of the value of each export shipment. The criticism does not appear tohave dampened the ALP governments enthusiasm for pursuing new trade deals, nor is itlikely to prompt a shift in the generally free-market stance of the LP.

In any case, the Australian government will maintain its special trade arrangements withregional neighbors New Zealand and Papua New Guinea, and will continue to pursue aliberal trade agenda within APEC. Officials in an LP-NP government will also seek todevelop new export markets and reduce exporters reliance on Asia.

Potential Threats to Social Calm

Although Australia faces little threat of destabilizing domestic turmoil during the forecastperiod, the pre-election bombing attack on the Australian Embassy in Jakarta, Indonesiain September 2004 highlighted the heightened vulnerability of the country to externalsources of turmoil arising from the Howard governments enthusiastic support for theUS-led war on terror and its cooperation with the US in both the war and reconstructionefforts in Iraq. While the ALP has benefited from public opposition to the war in Iraq,Labor will seek to maintain good relations with Washington.

The LP-NP government responded to the threat of terrorist attacks with the creation of aspecial anti-terror unit within the military and the approval of anti-terror measures that

increase police powers and restrict civil liberties. The ALP has acknowledged the needfor tough laws to contain the threat posed by militant Islamists, but has promised tostrike a better balance between security and civil rights. Rudd has proposed establishingan Office of National Security directly answerable to the prime minister and headed bythe national security advisor, which will be responsible for developing an integratednational security policy that safeguards both Australian citizens and their rights, and hasexpressed enthusiasm for closer regional cooperation to combat terrorism. While the

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ALPs approach is appealing from the standpoint of civil liberties, whether it will enhancedomestic security remains an open question.

Ethnic tensions represent a significant potential source of domestic unrest. In mid-December 2005, mobs of white males, totaling up to 5,000 persons, went on a rampagethat lasted several days, assaulting anyone of Arab appearance on and aroundSydneys southern beaches. The rioting, which came just weeks after the passage of theanti-terror laws, raised concerns within the countrys Muslim community that the climateof fear produced by the threat of terrorism will leave them vulnerable to similarcampaigns in the future. The ALP accused the Howard government of exploiting publicfear and racist sentiment for political gain, and has pledged never to resort to such tactics.

Another potential source of unrest stems from the demands of the Aboriginal population

for increased rights. In opposition, the ALP argued that true reconciliation will require aformal apology for the mistreatment of the indigenous population, together with policiesaimed at helping Aborigines to overcome the handicaps resulting from discriminationand their marginalization from the Australian mainstream. Rudd made a start towardputting that philosophy into action, but the opposition has warned that the ALPsapproach will not be tolerated by social conservatives, and so cannot succeed at bridgingthe racial divide. Moreover, it has become increasingly unclear whether the governmentwill be capable of backing up its position with financial resources. Should the minorityLabor government fail to follow through, there will be some danger of protests, and whilethe danger is slight, an eruption of unrest from this source may lead to attacks on foreign

businesses, which are a frequent target of complaint by many Aborigines.

Growth Will Accelerate over the Medium Term

The economy contracted by 1.2% (quarter-on-quarter) in the JanuaryMarch 2011 period,but staged a recovery in the second quarter, growing by a seasonally adjusted 1.2% on theback of inventory rebuilding and stronger household consumption. Year-on-year growthaccelerated to 1.4% in the second quarter, resulting in a half-year growth rate of 1.2%.

It is unclear whether inventory rebuilding was motivated by expectations of futuregrowth or simply lackluster demand, alternatives that have very different connotations

for the likelihood that the phenomenon will continue. In any case, consumer confidencehas been drifting lower of late, largely on fears that slowing global growth and weakerdemand from China will have a negative impact on the domestic economy.

The mining sector will put in a stronger performance in the second half of the year, as thedisruptions caused by flooding earlier in the year recede. Nevertheless, annual real GDPgrowth is forecast to remain below 2% in 2011.

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Inflation crept up to an annualized rate of 3.6% in the second quarter, fueled by higherfuel prices and a weather-related increase in food costs. Inflationary pressures should

ease as food production increases in those areas of the country not affected by the floodsearlier this year, a factor that in combination with a gloomy external outlook mayencourage the Reserve Bank of Australia to cautiously loosen monetary policy. In anycase, interest rates will not be increased from the current 4.75% until clear signs of ameaningful recovery are evident, and inflation is forecast to average 3.5% this year.

The 2011/2012 budget unveiled in May 2011 projects a deficit equivalent to about 1.5% ofGDP, compared to an earlier anticipated shortfall nearly twice as big. Among the factorsthat prompted the downward revision are expectations of stronger tax revenues frommining activities and a larger contribution to overall growth from private consumption.

Even more significant was the governments forecast of a surplus in 2012/2013, which isto be achieved through savings from reduced transfer payments to families and variousadjustments to the tax code as it affects spousal benefits and unemployed youth. Thegovernment also proposed holding spending increases to no more than 2% duringperiods of above-trend economic growth.

The budget projections assume that the economy will grow by 4% in 2011/2012 and by3.75% in 2012/2013, largely on the back of strength in the mining sector. However, withgrowth forecast to come in well below the target in 2011, the deficit is likely to be closer to3% of GDP. Tellingly, the budget included few details about either the carbon tax or the

proposed mining tax, the proceeds of which are the financial underpinning of a plannedregional infrastructure program.

The restoration of fiscal discipline cannot be put off indefinitely without risking anadverse reaction in the markets, and any government will be expected to move in thatdirection over the middle of the forecast period. Assuming general economic conditionsare sufficiently stable as to permit some easing of fiscal constraints later in the forecastperiod, economic growth rates should accelerate to 3%3.5, producing an average rate ofgrowth of close to 3% per year through 2016. The central bank will tighten monetarypolicy as necessary, and inflation is forecast to remain close to the upper limit of theRBAs comfort zone over the entire forecast period, averaging 2.8% per year through2016.

The national statistics office reported that the current-account deficit narrowed to$7.2 billion in the second quarter of 2011, after recording a shortfall of $10.9 billion in thefirst quarter, with a larger trade surplus (despite weaker-than-expected coal exports) anda smaller primary income account deficit accounting for the improvement. Exports will

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receive a boost from increased mining output, although demand for coal products willremain fairly sluggish as concerns about the health of the global economy mount, butdebt-servicing costs will keep the income balance in deficit and the services shortfall will

remain large. On balance, the current account deficit is forecast to widen to $35.4 billionin 2011, roughly equivalent to the 2010 deficit as a percentage of GDP.

A current account deficit of that magnitude will not be cause for serious alarm, but it willgenerate pressure for government action to trim the foreign debt, which currentlyamounts to somewhat less than 90% of GDP. In any case, relatively high debt-servicecosts will help to sustain a fairly sizeable shortfall in the income balance that willunderpin large current account deficits averaging $39.2 billion per year through 2016.

Second Most Likely Regime Scenario

18-Month Forecast Period:LP-NP Coalition (40% Probability)Five-Year Forecast Period:ALP (35% Probability)

The LP-NP alliance could be returned to power before the end of the 18-month forecastperiod, in the event of an early election. The most recent polls show the LP-NP coalitionholds a 10-point lead over the ALP in the primary vote, and heavily favored in a head-to-

head matchup. Although the ALPs partners in government have no real incentive tomake any moves that might trigger an early election, an effort by the opposition to forcethe resignation of a scandal-tainted ALP lawmaker has highlighted the vulnerability ofGillards majority, regardless of what any of the participants might prefer.

Alternatively, but somewhat less probable, the ALP could be returned to power at anelection held in 2013, especially in the event of a change of leadership in the interim. Inpolls of preferences for prime minister, Abbott holds a slim lead over Gillard, and issignificantly less popular than Rudd. The data suggests that voters are not particularlyimpressed by the LP leader, and he faces the risk of overreachingas in his suggestionthat the NBN be scrappedin his zeal to inflict damage on Gillards shaky government.

Less Enthusiasm for Investment Liberalization

Although the controversy surrounding the Clean Energy bill and the mining profits taxhas highlighted the ALPs interventionist inclinations with regard to economic policy, theparty has generally promoted a relatively business-friendly agenda. In the area of fiscalpolicy, the ALPs positions are so similar that Rudd was castigated by his opponents

ALP Growth(%)

Inflation(%)

CACC($bn)

2011 2.1 3.3 -33.90

2012-2016 3.0 2.6 -42.60

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during the 2007 campaign for practicing echo-nomics. However, the ALP criticized theLP-NP government for failing to contain the inflationary impact of its tax cuts andspending increases, and would focus its tax and spending programs on productivity and

employment, with the aim of reducing the inflation risk stemming from an expansionaryfiscal policy.

With regard to privatization, the ALP has adopted the position that the privatization ofassets, infrastructure, or services, including through the application of nationalcompetition policy, will only occur where, after a period of public consultation, such amove can be justified as demonstrably in the public interest.

The ALP has drawn up a 10-point federation reform plan that calls for closer coordinationbetween the national and state-territorial governments in the areas of infrastructuredevelopment, housing, education (including the establishment of a national curriculum),management of water resources, administration of hospitals, and provision of front-linehealth care and care for the aged, as well as an increased voice for local governments inpolicy-formulation and revenue allocation. The ALP has pledged to seek the voluntarycooperation of the state and territorial governments, but has indicated that in some areas(such as hospital administration) it is prepared to assert federal authoritywith popularassentif required.

The chief goals of federal reform are the elimination of overlap and duplication betweenthe national and state-territorial levels that by some estimates result in annual losses of upto $9 billion, as well as the harmonization of tax policies and regulations, and the

integration of administrative processes, with the aim of removing impediments tobusiness competitiveness arising from unnecessarily high compliance costs. The currentALP governments weakness has prevented Gillard from moving forward on the plan,but a majority ALP government formed later in the forecast period might be in a betterposition to take action.

The federation reform plan is a possible portent of a long-term shift in the relative powerof the national and state-territorial governments that could have significant implicationsfor business regulation down the road, particularly with environmental issues likely toloom large on the political horizon for the foreseeable future.

Steady Growth, Manageable InflationAssuming better-than-forecast growth would be a factor contributing to the ALPsretention of power with an outright majority, the accompanying stronger inflation wouldlimit the ability of officials at the Reserve Bank of Australia (RBA) to employ monetarytools to coax faster growth. In general, economic performance would be similar to thatunder an LP-NP regime, with real GDP growth averaging 3% per year through 2016 andinflation averaging 2.6% annually over the same period. A stronger currency would have

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a dampening effect on exports, contributing to a somewhat larger current account deficitaveraging $42.6 billion annually over the five-year forecast period.

Third Most Likely Regime Scenario

18-Month Forecast Period:Divided Government (15% Probability)Five-Year Forecast Period:Divided Government(10% Probability)It is possible that the hung Parliament resulting from the 2010 election could become aregular feature of the political landscape, with future elections (possibly including anearly election held in the 18-month forecast period) failing to produce a clear victory for

either the ALP or the LP-NP coalition, resulting in successive administrations incapableof securing reliable majority support in both the Senate and the lower house. Such ascenario would limit the ability of the government to take aggressive action, whether toimprove the climate for business or to roll back some of the reforms implemented underthe series of LP-NP governments. The result would be continuous negotiations andcompromises on key issues, the possibility of three elections before the end of the five-year forecast period, and leadership challenges within both of the main parties.

Uncertain Climate for Foreign Investment and International Trade

Although restrictions on investment would remain moderate under this scenario, internalconflict and political uncertainty would deter foreign investment. The governmentwould also experience conflict over privatization, and the failure to achieve consensuswould prevent any further significant progress on structural reforms.

Some Increase in Disorder

The perception of an unstable leadership would embolden government critics to organizeprotests. However, protests would probably neither target nor have a significantnegative impact on international business operations.

Sluggish Economic Performance

Conditions of divided government through the second half of the forecast period would

create an obstacle to the recovery of business and consumer confidence. Real GDPgrowth would average just 2.2% annually through 2016, reflecting the impact of weakerdomestic demand, which would help to hold inflation below 3% per year on average overthe forecast period. Weaker demand for imports would result in narrower externaldeficits, which would nevertheless remain substantial, with the current account deficitaveraging $37.4 billion per year through 2016.

DividedGovernment

Growth(%)

Inflation(%)

CACC($bn)

2011 1.9 3.2 -32.40

2012-2016 2.2 2.9 -37.40

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Forecast Summary

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIESMinority ALP45%

LP-NP Coalition40%


RISK FACTORS CURRENT

Turmoil Low Same Same SLIGHTLY MORE

Investment

Equity Moderate Same Same Same

Operations Moderate SLIGHTLY MORE Same Same

Taxation Low Same SLIGHTLY LESS Same

Repatriation Low Same Same Same

Exchange Low Same Same Same

Trade

Tariffs Low Same Same Same

Other Barriers Moderate SLIGHTLY MORE Same Same

Payment Delays Low Same Same Same

Economic Policy

Expansion Low SLIGHTLY LESS SLIGHTLY LESS SLIGHTLY LESS

Labor Costs High Same Same Same

Foreign Debt Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE

SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIESLP-NP Coalition55%

ALP35%


RISK FACTORS BASE

Turmoil Low Same Same SLIGHTLY MORE

Restrictions

Investment Low SLIGHTLY LESS Same Same

Trade Low SLIGHTLY LESS SLIGHTLY LESS Same

Economic Problems

Domestic Moderate Same Same SLIGHTLY MORE

International High SLIGHTLY LESS SLIGHTLY LESS Same

* When present, indicates forecast of a new regime

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Australia

Real GDP Growth Under Alternative Regimes

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2006 2007 2008 2009 2010e 2011f 2012-

2016f

(percent)


Australia

Inflation Under Alternative Regimes

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2006 2007 2008 2009 2010e 2011f 2012-

2016f

(percent)


Australia

Current Account Under Alternative Regimes

-60.0

-55.0

-50.0

-45.0

-40.0

-35.0

-30.0

2006 2007 2008 2009 2010e 2011f 2012-

2016f

($billions)


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28-Oct-2011 Reproduction without written permission of The PRS Group is strictly prohibited.

Political Framework 28-Oct-2011 Page 27

AustraliaCountry ForecastPolitical Framework

Players To Watch

Julia Gillard: The prime minister assumed leadership control of the ALP through a partycoup carried out in mid-2010, and just barely averted a defeat at the August generalelection that most likely would have brought a very early end to her tenure in the toppost. Gillard managed to form a minority government with the backing of three

independent lawmakers, but satisfying the members of her own party, her governmentsindependent allies, and the Greens (on whom the ALP will depend for a majority in theSenate) will be a challenge, especially as opposition leader Tony Abbott has declared hisintention to thwart Gillard at every step. Sustaining her majority has required her torelinquish significant influence over policy to her non-ALP partners, in some cases at therisk of further weakening her already sagging popular support. Barring a rebound in herapproval rating, Gillard could be challenged by the man she replaced, Foreign MinisterKevin Rudd, ahead of the 2013 election.

Anthony John Abbott: The LP leader wrested control of the party from Malcolm

Turnbull in late 2009, a move prompted by Turnbulls expressions of support for theALPs carbon-trading scheme. Abbott very nearly led the opposition coalition to victoryat the August 2010 elections, and he has taken every opportunity to shake thefoundations of Julia Gillards fragile minority government. He has pledged to overturn acarbon tax set to come into force in July 2012 if elected prime minister, and recent pollsindicate that he has a good shot at winning the job, especially in the event of an earlyelection.

Australian Labor Party: The governing party was reinvigorated by the election of KevinRudd as party leader in late 2006, and exploited broad popular opposition to the LP-NP

governments labor-market reforms to reclaim power at the national level for the firsttime in more than a decade in 2007. However, Rudds popularity slumped badly as aresult of his retreat on a carbon-reduction plan, and he was replaced as party leader byGillard in mid-2010. The ALP depends on the support of independents and the Greensfor majorities in the lower chamber and the Senate, respectively, and the compromisesthat will be required to retain the backing of its allies could trigger factional infighting. In

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Page 28 28-Oct-2011 Political Framework

general, the government party will seek to ensure long-term economic health by pursuingpolicies aimed at creating an inviting climate for business.

Wayne Swan: The treasurer (and now deputy prime minister) will play a key role in theALP governments efforts to fulfill its promises to its core constituency of low- andmiddle-income families without undermining the confidence of the business community.Swans first budget, which combined tax relief with spending cuts was a good first step,but with the ambitious deficit target for 2011/2012 likely to be missed, the task will bemore challenging going forward.

Liberal Party: Widespread popular opposition to liberal economic reforms introduced bythe LP government, particularly in the area of labor-market reform, contributed to thepartys loss of power at the 2007 general election. The party has changed leaders three

times since its defeat, but has regained its footing under Abbott, and came very close tounseating the ALP at the election held in August 2010. The Liberals and their traditionalelectoral ally, the National Party, hold a sizeable lead over the ALP in recent polls, andGillard will have her work cut out for her rebuilding support for her party before anelection that must be held no later than 2013.

National Party: The junior partner in a coalition with the LP, the NP generally supportsmarket reforms, but while in government used its leverage to win concessions from itspartner aimed at ensuring that reforms did not impact negatively on its mainly ruralconstituency.

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1-May-2011 Reproduction without written permission of The PRS Group is strictly prohibited.

Climate for Investment & Trade 1-May-2011 Page 1

AustraliaCountry ConditionsClimate for Investment & Trade

Overview

Openness to Foreign Investment

Australia welcomes foreign investment. The United States is the largest direct investor in Australia, whileAustralia is the ninth largest source of foreign direct investment (FDI) for the United States. In 2009, U.S.investment in Australia was A$514 billion while Australian investment in the United States was A$404billion. U.S. FDI in Australia accounts for 23% of total foreign investment in the country and is concentratedlargely in resources and energy, manufacturing, and the nonbank financial services sector. Inward foreigndirect investment is regulated by the Foreign Acquisitions and Takeovers Act 1975 and associatedregulations. The Act sets out a number of minimum thresholds under which smaller scale investmentproposals do not need approval. Under the Australia-U.S. Free Trade Agreement (AUSFTA), higher (i.e.,more favorable) screening thresholds apply to U.S. citizens and corporations than to other foreign entities.

The Foreign Investment Review Board (FIRB), a subdivision of the Australian Treasury Department,reviews investment proposals. Based on advice from the FIRB, the Treasurer can block or impose conditionson proposals that are contrary to the national interest. The national interest test seeks to ensure thatinvestment and sales decisions are driven by market forces rather than external strategic or non-commercial considerations. All foreign governments and their related entities are required to notify theAustralian government and get prior approval before making a direct investment in Australia, regardless ofthe value of the investment.

Foreign Investment Regulations. There is no restriction on greenfield investment in Australia andacquisitions by U.S. investors up to A$1,004 million are excluded from review by the FIRB apart fromprescribed sensitive sectors, where a A$231 million threshold applies. To calculate the value of a business orcorporation, investors need to consider the value of the total issued shares of a corporation or its total grossassets, whichever is higher.

Thresholds in sensitive areas U.S. investors in developed commercial real estate that is valued at A$1 ,004 million or more

need to notify the FIRB (compared to A$50 million for non-U.S. investors); Total foreign investment in Australian international airlines (including Qantas) is limited to 49%; The Airports Act 1996 limits foreign ownership of airports offered for sale by the

Commonwealth to 49%, with a 5% airline ownership limit and cross ownership limits between

Sydney airport (together with Sydney West) and Melbourne, Brisbane and Perth airports; The Shipping Registration Act 1981 requires a ship to be majority Australian-owned if it is to be

registered in Australia; Aggregate foreign ownership of Telstra is limited to 35% of the privatized equity and individual

foreign investors are only allowed to own up to 5%; and All investments of 5% or more in the media sector, regardless of the value of the investment,

require FIRB approval.

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Political Risk Services Australia Country Conditions1-May-2011 Reproduction without written permission of The PRS Group is strictly prohibited.

Page 2 1-May-2011 Climate for Investment & Trade

Foreign Investment Policies. Under Australias Foreign Investment Law, the Foreign Investment ReviewBoard (FIRB) screens potential foreign investments in Australia above a threshold value of A$231million($231million). The FIRB may deny approval of particular investments above that threshold on national

interest grounds, although it rarely has done so. The AUSFTA, however, exempts all new U.S. greenfieldinvestments from FIRB screening. The AUSFTA also increased the threshold at which U.S. proposals toinvest in non- sensitive sectors are screened, from $A50 million to $A800 million indexed annually ($A1,004million in 2010). Investment proposals made by foreign governments, including by the U.S. government,must be reported to the FIRB.

Takeovers of domestic firms by foreign investors are rarely interfered with and are treated under the sameguidelines as any other investment. Occasionally there are strong public reactions to foreign investmentproposals, particularly from Chinese state companies, but these rarely involve U.S. companies. There are noprohibitions on overseas investment or capital repatriation.

As addressed earlier in the Openness to Foreign Investment section, the FIRB uses a national interesttest to examine foreign investment proposals. Proposals are evaluated according to their consistency with

existing government policy and law, where these are taken to define important aspects of national interest(for example, competition policy and environmental laws). National security interests and economicdevelopment priorities are also considered. The Commonwealth Treasurer ultimately decides whether ornot an investment is contrary to the national interest.

The FIRB publishes statistics of proposals to invest in Australia. In 2008-09, 5,352 proposals received foreigninvestment approval. This compared with 7,841 in 2007-08, representing a decrease of 32%. In 2008-09, threeproposals were rejected (all related to real estate purchases) compared with 14 proposals rejected in 2007-08. In the 2008- 09 FIRB annual report (the latest available), 5,352 foreign investment proposals receivedapproval, compared with 7,841 in 2007-08, representing a decrease of 32%. The real estate sector recorded4,827 approvals, representing a decline of 34% on the 7,357 approvals in 2007-08. There was an overallincrease in approvals in other sectors in 2008-09 compared with 2007-08, from 484 approvals to 525

approvals, representing an increase of 8%.

Approvals in 2008-09 involved proposed investment of A$181 .4 billion, a 5% decrease on the previousyears approvals of A$191.9 billion. Approved investment in real estate was A$23.4 billion in 2008-09(compared with A$45.5 billion in 2007-08), while approved investment in other sectors was A$158 billion,compared with A$146.4 billion in 2007-08, representing an increase of 8%.

The mineral exploration and development sector was the largest destination by value, with approvedinvestment in 2008-09 of A$90.6 billion (A$64.3 billion in 2007-08). The other major destinations were:services, with approved investment of A$31 .7 billion (A$35.7 billion in 2007-08); real estate, with approvedinvestment of A$23.4 billion ($45.5 billion in 2007-08); and manufacturing, with approved investment ofA$19.1 billion (A$31.3 billion in 2007-08).

The United States was the largest source country for foreign investment in 2008-09, involving approvedinvestment of A$39.6 billion. China (A$26.6 billion), Japan (A$22.1 billion), the United Kingdom (A$20.3billion), and France (A$7.5 billion) were the other major source countries of approved investment in2008-09.

Sector-specific regulation Media. Foreign ownership of Australian media assets is regulated by the ForeignAcquisitions and Takeovers Act 1975 and Australias Foreign Investment Policy. All foreign persons,including U.S. investors, must notify the Australian government and get prior approval to make

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Political Risk Services Australia Country Conditions



investments of 5% or more in the media sector, regardless of the value of the investment. The media sectorincludes daily newspapers, television and radio, as well as including internet sites that broadcast orrepresent these forms of media.

Civil Aviation. The Australian Government released its National Aviation Policy Statement, or WhitePaper, on December 16, 2009. The White Paper retained the basic limit of 49% foreign ownership stake inAustralias international airlines, originally set under the Air Navigation Act of 1920 and the Qantas SaleAct of 1992, intended to ensure Australias airlines remain majority Australian owned and controlled.However, the White Paper proposed the removal of additional restrictions on foreign ownership (i.e. 25%for foreign individual shareholdings and 35% for total foreign airlines shareholdings).

The Government will consider more flexible arrangements for ownership of its airlines, other than Qantas,with governments with which Australia has negotiated Open Aviation Market agreements, [including theUnited States, which concluded an Open Skies Agreement with Australia in 2008]. In relation to thedomestic carrier market, foreign investors can generally expect approval to acquire up to 100% of adomestic carrier (other than Qantas), or establish a new domestic aviation operation, unless this is contrary

to the national interest.

Airports: In relation to the airports offered for sale by the Australian Government, the Airports Act of 1996stipulates a 49% foreign ownership limit, a 5% airline ownership limit, and cross-ownership limits betweenSydney airport (including Sydney West) and Melbourne, Brisbane and Perth airports.

Telecommunications. In February 2007, the Australian Government transferred its remaining 17% stake inTelstra into an independent Future Fund, reducing concerns about its conflicting roles as regulator andowner of the dominant operator. The United States remains concerned about foreign equity limits onTelstra, which are still capped at 35% total and up to 5% for individual foreign investors.

In June 2010, Telstra signed a non-binding Financial Heads of Agreement with NBN Company (NBN Co) to

participate in the rollout of the Commonwealth Governments National Broadband Network (NBN)initiative. The agreement provides for the decommissioning of Telstras copper network and cablebroadband service and use of Telstras infrastructure. The transaction would see Telstra progressivelymigrate its voice and broadband traffic from its copper and cable networks to NBN Cos network, which isto be a neutral provider of broadband services. Other telecommunications companies, such as Optus, willalso join the NBN. In December 2010, the Parliament passed legislation to separate Telstra's retail andwholesale arms, with the latter coming under the NBN. The United States will monitor the NBN to ensurethat competitors are able to obtain reasonable access to services and customers.

Audiovisual Trade Barriers. Though preexisting Australian-content requirements remained in effect underthe AUSFTA, the agreement limited or prohibited their extension to other media or means of transmission.Australia maintains strict domestic content requirements on all free-to-air television programmingbroadcast between 6:00 a.m. and midnight. Australias Broadcasting Services Amendment Act requiressubscription television channels with significant drama programming to spend 10% (with the FTA allowingflexibility, under certain circumstances, to increase this up to 20%) of their programming budgets on newAustralian drama programs.

The Australian Content Standard of 2005 (still in effect) requires commercial television broadcasters toproduce and screen Australian content, including 55% of transmission between 6am and midnight. Inaddition, there are specific minimum annual sub-quotas for Australian (adult) drama, documentary, andchildrens programs. In July 2010, the Australian government provided license fee rebates of 25% in FY 2010

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and 41.5% in FY 2011 to commercial television broadcasters in order to help them maintain Australiancontent production.

Radio. The Australian commercial radio industry code of practice sets quotas for the broadcast ofAustralian music on commercial radio. The code requires that up to 25% of all music broadcast between6:00 a.m. and midnight be music performed by Australians. In July 2010, the Australian Communicationsand Media Authority (ACMA) announced registration of a new code that provides temporary exemptionfor digital-only commercial radio stations (stations not also simulcast in analog) from the Australian musicquotas. The exemption will be reviewed in 2013. Since January 2008 all licensees of regional commercialradio broadcasting licenses have been required to broadcast minimum levels of local content.

Incentives for Investment. Hundreds of major foreign firms in most industry sectors invest in Australia.The Australian Commonwealth and State Governments offer incentives to multinationals to establishoperations in Australia and benefit from Australia's safe and stable business environment and skilledworkforce.

Incentives that are available to investors include: The Commonwealth Government introduced changes to the tax treatment of research and

development (R&D) from July 1, 2010. The system provides a refundable tax credit equal to 45%of expenditure on R&D to companies with an annual turnover of less than A$20 million. Forcompanies which exceed this threshold, a tax credit equal to 40% of expenditure on R&D will beprovided, but is not be refundable. The new policy involves a tightening in the definition ofeligible R&D. The aim of the new system is to broaden access to the concession.

Venture capital tax concessions: Capital gains tax exemptions are available for nonresidentinvestment in Australian venture capital. The exemptions apply to investors from the U.S., theUnited Kingdom, Japan, Germany, France, and Canada.

The Invest Australia Supported Skills (IASS) program is designed to encourage internationalfirms to choose Australia as a location for direct investment by providing streamlined

immigration arrangements for eligible employees of a company that is considering making asignificant or strategic investment in Australia.

The Green Car Innovation Fund (GCIF) is part of the Government's A New Car Plan for aGreener Future program and provides assistance over ten years, beginning 2009-10, to design,develop, and manufacture low-emission, fuel-efficient cars and components in Australia. TheA$1 .3 billion (US$1.2 billion) fund provides assistance to Australian companies for projects thatenhance the research, development, and commercialization of Australian technologies thatsignificantly reduce fuel consumption and/or greenhouse gas emissions of passenger motorvehicles. Grants are provided at a ratio of A$1 of government funding for every A$3 of eligibleexpenditure contributed by the grantee.

The Tradex Scheme allows an importer to gain an up-front exemption from customs duty andGST on imported goods that are intended for export or to be used as inputs to exports. The goods

may be exported in the same condition as imported, subjected to a process or treatment afterimportation, then exported or incorporated in other goods which are exported. Export may becarried out by the importer or a third party. The goods must be exported within 12 months ofimportation, although approval can be sought to extend this period.

Transparency of the Regulatory System

Australia subscribes to the 1976 declaration of the Organization for Economic Cooperation andDevelopment (OECD) concerning International Investment and Multinational Enterprises. The instruments

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cover national treatment and investment incentives and disincentives, and spell-out voluntary guidelinesfor the conduct of multinational enterprises in member countries. Australia also subscribes to two OECDcodes of liberalization, one covering capital movements and the other invisible transactions.

Australia ranked third in 2010 (behind Hong Kong and Singapore) on the Heritage Foundations rankingsfor economic freedom. According to this measure, the survey found that Australia ranks highly in the teneconomic freedoms and that: Overall, the Australian economy is well equipped in terms of its structuralstrength. Monetary stability and openness to global commerce continue to facilitate a competitive financialand investment environment based on market principles. A strong rule of law protects property rights, andcorruption is perceived as minimal. Both foreign and domestically owned businesses enjoy considerableflexibility under licensing and regulatory schemes and in their employment practices. Measures to enhancepublic finance and maintain long-term fiscal sustainability are focused on achieving better efficiency andeffectiveness.

In 2010, Australia was ranked as the second easiest place in the world to start a business, according to theWorld Bank. It ranked tenth in terms of 'ease of doing business' ranking, sitting in 10th place and was the

sixth easiest place to obtain business credit. The Australian economy recorded 19 years of uninterruptedgrowth to 2010, despite two global downturns. The 2010 Institute for Management Development (IMD)World Competitiveness Yearbook rated the Australian economy the second most resilient in the world. Forcountries with populations greater than 20 million, Australia ranked first in 2009 and 2010, and has toppedthis category in eight of the previous nine years.

Foreign/Free Trade Zones/Ports

Australia does not have free trade zones.

Tariff and Non-tariff Barriers

Quarantine. The Australian Quarantine and Inspection Service (AQIS) (http://www.daff.gov.au/aqis) is

the federal body responsible for enforcing Australias quarantine regulations, including issuing permits andinspecting shipments.

Australia is a signatory to the WTO Agreement on the Application of Sanitary and Phytosanitary (SPS)Measures (April 15, 1994). U.S. exporters, however, may find it difficult to comply with Australias importquarantine requirements. Aside from issues relating to the importation of food and animals, quarantinemeasures cover a number of other imported products such as farm, mining and construction machinery,some packaging goods, and other products that may pose a contamination risk to Australias agriculturalindustry or natural environment.

The Australian government enforces its quarantine measures very seriously. Importers have little recourseonce a shipment encounters quarantine issues.

Machinery imports may require an AQIS-issued import permit. It is a condition of the permit thatmachinery arrives in a clean (refers to clean as new) or new state. Australian importers should contactAQIS to determine if they need an import permit. Note: The classification of machinery as 'new' and'agricultural' is at AQIS' discretion. For quarantine purposes, new field-tested equipment is classified asused machinery, and will require an Import Permit. AQIS has the power to re-export contaminatedmachinery. More detailed information relating to the import of machinery can be found at:http://www.daff.gov.au/aqis/import/vehicles-machinery/regulations

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Packaging of imported goods presents a challenge to U.S. exporters, particularly where the packingmaterials include wood or other natural products. Detailed information on the compliance requirementscan be found at:

http://www.aqis.gov.au/icon32/asp/ex_casecontent.asp?intNodeId=8880434&intCommo dityId=1 7670

For complete information on products that need to comply with Australias quarantine regulations, U.S.exporters should check the requirements on the AQIS import condition (ICON) database athttp://www.aqis.gov.au/icon. Click on ICON Search and enter the commodity name and end use andconduct a pattern match search.

Chemical Import Requirements. There are several agencies that deal with importing chemicals to Australia,depending upon the proposed end-use of those chemicals or compounds. The primary agency responsiblefor chemical imports is the National Industrial Chemicals Notification and Assessment Scheme (NICNAS) -http://www.nicnas.gov.au

Other agencies involved in regulating chemical imports include: Food Standards Australia New Zealand (FSANZ) - http://www.foodstandards.gov.au Australian Pesticides & Veterinary Medicines Authority (ASPVMA)

http://www.apvma.gov.au

The Australian importer is responsible for notifying the relevant agency of the chemical it is importing toAustralia. The Australian importer may be a local subsidiary of a U.S. firm, an agent, or an end-user. Theimporter usually completes the required paperwork.

Given the high level of regulation, U.S. exporters should find Australian agents or importers familiar withrequirements. NICNAS provides some guidance on the regulation of chemicals in the following brochure:http://www.nicnas.gov.au/Industry/Compliance/Compliance_Simple_Guide_PDF.pdf

U.S. exporters may also need to ensure that products comply with the Australian Dangerous Goods Coderequirements, which are based upon international standards. State-based government health and safetyagencies enforce these codes. The codes differ slightly from state-to-state. The following link provides a listof these agencies: http://www.emplan.com.au/dangerous-goods/dangerous-goods.htm

Non-Tariff Barriers. In addition to the elimination of tariffs, AUSFTA provides a range of other benefitssuch as: certain services markets are now open, intellectual property receives better protection, predictableaccess facilitates investments, and U.S. firms can compete in Australia for government tenders on anondiscriminatory basis. Some of these relaxations have not yet come into effect. Until such time, existingbarriers to a free flow of trade will remain. The agreement does not exclude provisions for localbroadcasting content and local content in major defense contracts. The full text of the AUSFTA is availableon the Department of Foreign Affairs and Trade website,http://www.dfat.gov.au/trade/negotiations/us_fta/final-text/index.html

Policies

Conversion and Transfer

The Australian dollar is a fully convertible currency. The government does not maintain currency controlsor limit remittance, loan or lease payments. Such payments are processed through standard commercialchannels, without governmental interference or delay.

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Performance Requirements

As a general rule, foreign fir

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