Australia’s AAA rating at risk as S&P cuts outlook on fiscal gridlock
SYDNEY — S&P Global Ratings cut the outlook on Australia’s AAA credit rating to negative from stable on Thursday (July 7), as it warned the prospect of fiscal-policy gridlock could thwart government attempts to rein in a Budget deficit.
SYDNEY — S&P Global Ratings cut the outlook on Australia’s AAA credit rating to negative from stable on Thursday (July 7), as it warned the prospect of fiscal-policy gridlock could thwart government attempts to rein in a Budget deficit.
It also said there is a one-in-three chance of a ratings downgrade should the government fail to materially improve its balance sheet.
The agency acted following Saturday’s Federal Election, which has not delivered either Prime Minister Malcolm Turnbull’s Liberal-National coalition or the main opposition Labor Party a strong mandate, potentially weakening the eventual winner’s ability to push through fiscal savings measures. While the coalition is edging ahead as counting continues, it remains unclear whether it will gain enough seats to form government.
“The negative outlook on Australia reflects our view that without the implementation of more forceful fiscal policy decisions, material government Budget deficits may persist for several years with little improvement,” said S&P in a statement on Thursday. There is a “one-in-three chance that we could lower the rating within the next two years”.
While the three main rating companies warned on Monday that Australia’s grade may come under pressure following the election result, and Treasurer Scott Morrison took to television within half an hour of S&P’s statement on Thursday, markets appeared more relaxed.
Australia’s dollar weakened as much as 0.7 per cent to 74.67 US cents following the statement, before rebounding to 75.05 US cents as of late afternoon in Sydney.
Against the Singapore dollar, the Aussie fell as low as S$1.0092, before gaining back some ground to S$1.0134.
“The fact the rating wasn’t actually downgraded was positive,” said Mr Jason Wong, a currency strategist at Bank of New Zealand in Wellington. “By global standards, Australia is a very strong credit.”
Australia was last stripped of its top ratings by both S&P and Moody’s Investors Service in 1986. Moody’s restored the top tier score in October 2002, with S&P following in February 2003. Fitch Ratings awarded Australia a AAA ranking in 2011, and the country is currently one of just 10 to hold the highest score from all three major assessors — for now.
S&P warned the AAA could be lost if it believes “that Parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector Budget deficit to narrow materially and to be in a balanced position by the early 2020s”.
On the positive side, S&P said it considered Australia’s banking system to be one of the strongest globally and described the country as a “wealthy, diversified and resilient economy”. “The economy’s resilience and flexibility, we believe, ultimately help cushion government finances from economic shocks and are a major support to Australia’s creditworthiness,” it said.
S&P noted economic growth was picking up pace after a period of below-trend performance and estimated headline GDP growth to be about 3 per cent in fiscal year 2016, beating most of its rich world peers.
Australia boasts an enviable growth track record and has not seen a recession in more than 25 years.
S&P provides “important context for the incoming Parliament about the reality of the fiscal environment and the global economic environment,” Treasurer Scott Morrison told reporters. The government needs “to live within our means when it comes to the fiscal settings of the Commonwealth”.
“I have no intention of postponing the pace of fiscal consolidation and so I remain very determined to ensure that the warnings that are in this report are not realised,” he added. AGENCIES