Australia’s AAA credit rating safe for now: Standard & Poor’s

Australia’s AAA credit rating safe for now: Standard & Poor’s

19 May 2017

Standard & Poor’s reaffirmed Australia’s AAA credit rating, but they maintain their negative outlook.

The global ratings agency cited Australia’s strong institutions and well-developed economy as grounds to maintain the AAA rating: “Along with strong institutions, a credible monetary policy, and floating exchange-rate regime, Australia’s public finances traditionally have been a credit strength for the sovereign rating. More recently, however, they have weakened.”

Although the government’s stated objective is a return to surplus by 2020-21, S&P remains doubtful. Even if a surplus is achieved by then, “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.”

In explaining its negative outlook, S&P’s report states that “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. Strong fiscal accounts are also a precondition for counter-cyclical policies to stabilize the economy if needed, such as in the case of a slump in the buoyant housing market.”

S&P said that if signs appear that Australia will be unable to return to surplus by the 2020-21, a ratings downgrade may be likely. “The outlook has been negative since July 2016. 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. A strong fiscal position is required … 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. … We believe the fast and sustained growth in credit and house prices will increase risks to fiscal accounts, real economic growth, and financial stability.”

S&P concluded that any improvement in the outlook would depend on evidence of medium-term budget improvements and a stabilisation of house prices. “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.”