Australia's AAA credit rating just avoided a downgrade from Standard and Poor's

Safe! Picture: Getty Images
  • Standard and Poor’s has removed its negative outlook on Australia’s AAA sovereign credit rating, greatly reducing the risk of a near-term downgrade by the group.
  • It says the stable outlook reflects an expectation that Australia’s budget will return to surplus by the early 2020s.
  • It says the rating could come under pressure again if house prices fall sharply.

A downgrade to Australia’s AAA credit rating is no longer a near-term threat with Standard and Poor’s (S&P) revising its outlook from “negative” to “stable” today.

“The stable outlook reflects our expectations that the general government fiscal balance will return to surplus by the early 2020s,” the ratings agency said in a statement.

“We expect steady government revenue growth supported by the strong labor market and relatively robust commodity prices, to be accompanied by expenditure restraint.

“We also expect property prices to continue their orderly unwind, and that this slowdown won’t weigh heavily on consumer spending and the financial system’s asset quality.”

S&P said the outlook change reflects an expectation that Australia’s budget will return to surplus in fiscal 2021, one year later than the government forecast in May’s budget.

“We expect large infrastructure spending at the state government level to likely keep the general government balance negative till fiscal 2021,” it said.

S&P placed Australia’s sovereign credit rating on watch for a potential downgrade in mid 2016, warning that without the implementation of more forceful fiscal policy decisions, “material government budget deficits may persist for several years with little improvement”.

Now that the fiscal position has improved, it’s now removed the threat of downgrading Australia’s credit rating for the first time in three decades, rejoining the ranks of Moody’s and Fitch who both retain a top rating for Australia with a stable outlook.

However, while a near-term downgrade is now highly unlikely, S&P says Australia’s rating could come under pressure from a steeper and larger downturn in the housing market.

“While our base case is for a soft landing, our ratings could come under pressure if house prices fall sharply and increase risks to fiscal accounts, real economic growth, and financial stability,” it said.

It also said the rating could be lowered if it considers it unlikely that the government budget will return to surplus over the next five years.

“Australia’s weak external position means that its other sovereign credit factors, including the fiscal factors, need to be strong to keep the sovereign rating at the highest level on our scale,” it said.

“A stronger fiscal position would also be a strong buffer to absorb the consequences of an abrupt weakening of the housing market and the vulnerabilities that event could bring to financial stability.”

Suggesting the move from S&P was largely priced in, there has been negligible reaction in Australian financial markets to the announcement.

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