The Commonwealth government’s debt load is pushing against the rating agencies AAA boundary and putting Australia’s rating at risk, according to Peter Jolly, the NAB’s global head of research.
That means treasurer Scott Morrison will need to walk the fine line between the political reality of a looming election and the need for ongoing fiscal restraint in order to slow the growth of Australian government debt.
“A quick look at Australia’s recent fiscal trajectory makes it clear why restraint will be required – at least if keeping the AAA rating is a desired policy outcome,” Jolly said in a note to clients.
Jolly said from a global perspective, Australia’s gross debts at a Commonwealth, state and local level remain “fairly modest”. But he also suggested such comparisons flatter Australia and mask the deterioration in the nation’s debt position.
“The latest ratio of 15% of GDP to June 2015 is above the long run average and is forecast to rise further and peak at 18.5% of GDP by June 2018,” Jolly wrote.
But it’s not just debt that ratings agencies look at when assessing a nations sovereign credit rating Jolly said. They also “assess factors like the economy (a strength for Australia), institutional frameworks (a strength), the external liabilities of all of Australia (a weakness), monetary flexibility (a strength), as well as the government’s fiscal position (for now a strength)”.
Jolly said the deterioration in the government’s position and recent rating agency comments that it’s now clear “the Commonwealth is starting to push against the AAA boundary”.
That matters because Australia’s AAA rating affords it membership of a small and elite club of nations who are able to consistently attract capital, and attract that capital and investment at reduced margins over the prevailing level of interest rates in the economy than lower rated countries.
For a country with a chronic current account deficit and as a nation that has perpetually relied on foreigners to help fund economic activity, Australia’s AAA rating is an important part of lowering overall borrowing costs in the economy. Crucially, it’s also important for Australia’s banks who are the intermediaries funding economic activity.
But Jolly says “the good news is that for now the ball remains in the court of the government”. But he warns the treasurer needs to keep the rating agencies comfortable with Australia’s AAA rating. As a result, the “May budget will need to demonstrate ongoing restraint”.
That means fiscal policy will continue to be a handbrake on growth which in itself might ultimately cause a problem for the economy and Australia’s AAA rating.