S&P affirms Australia’s AAA rating – with a warning

S&P affirms Australia’s AAA rating – with a warning
Ratings agency S&P has kept Australia’s prized AAA credit rating.

But it reiterated its warning that Australia’s outlook is negative and has cast doubt on the Budget returning to surplus.

It said the nation’s top notch rating would rest on a firm footing once housing and credit had moderated and the budget outlook had improved.

“The ratings could stabilize if we were to see a significant and sustained improvement in the medium-term budget outlook, leading to a return to a general government surplus. A stabilization of the ratings would also require a meaningful moderation of the credit and house price boom,” S&P said.

The warning comes at a time when house prices in Melbourne and Sydney are continuing to surge in response to low interest rates.

S&P warned that Australia’s rating could be cut if the government did not bring its deficit under control.

“We could lower our ratings within the next two years if we were to lose confidence that the general government fiscal deficit will revert into surplus by the early 2020s.” S&P said. “A strong fiscal position is required to offset Australia’s weak external position. It is also needed to allow for a strong buffer to absorb the fiscal consequences if the ongoing boom in the credit and housing market were to abruptly end.”

It said the ratings outlook remains negative “reflecting risks to the Government’s fiscal consolidation plan and risks to the economic, fiscal, and financial stability outlook should the rapid growth of credit and house prices continue.

It warned that meant budget deficits could persist for several years, with little improvement “unless the parliament implements more forceful fiscal policy decisions.”

“We believe Australia’s high level of external indebtedness creates a high vulnerability to major shifts in foreign investors’ willingness to provide capital, and we consider that strong fiscal performance and low government debt are important to help ameliorate this risk,” S&P said.

“Strong fiscal accounts are also a precondition for countercyclical policies to stabilize the economy if needed, such as in the case of a slump in the buoyant housing market.”

S&P noted the government’s budget had forecast a return to surplus in 2021 eight years later than the previous government’s 2010 projection of fiscal 2013.

This was not good enough, S&P said.

“If achieved, it would come more than 10 years after the global recession pushed the central government budget into deficit. This substantial delay in fiscal repair, and the risk of further delay, raises our doubt over the ability of the Australian government to meet its fiscal objectives,” it said.

 



An award winning author and journalist, commentator, lecturer, and speaker, Leon is a freelance business journalist who covers a range of areas including politics, strategy, globalization, leadership and all the big trends ahead. His main skill is summing up all the news that’s around. For the last 30 years, his main focus has been on management issues. He also produces two podcasts for RMIT University, Talking Business and Talking Technology. Leon has worked for Fairfax, News Limited, AAP and the Herald and Weekly Times.