Why Australia doesn’t face sovereign risk in the gas markets

Shortages of gas in the Australian market have led to calls for the government to impose restrictions on gas exports. Energy industry executives have responded by saying that market interventions would create a “sovereign risk”, deterring foreign investors and buyers of Australian gas.

But this doesn’t apply to Australia for a number of geographic and geopolitical reasons. We’re on the doorstep of some of the largest gas importers in the world – and gas is very costly to ship. Qatar, one of our major competitors, is mired in a diplomatic standoff with its neighbours, and Russian gas negotiations with China have broken down.

To cap it off, Australia is negotiating a mega free trade agreement with Japan, China and South Korea (all major gas importers), among others. This makes it unlikely the federal government will do anything to upset the status quo.

What is sovereign risk?

When governments default on debt or confiscate private assets this creates concerns among foreign investors that their interests could also be affected by authorities. This is the heart of sovereign risk. It leads investors to charge higher interest rates to make the risk worth it, or forgo investment all together.

Research shows that these higher interest rates (called a “risk premium”) can destabilise financial markets and put pressure on local companies. Read more

Giovanni Di Lietto – The Conversation – 27 Sep 2017