MOODY'S: Debt is still affordable, so don't worry about it rising in Australia

. (Photo by Paula Bronstein/Getty Images)

Australia’s high level of debt affordability mitigates the erosion of fiscal strength as the nation’s debt surges, Moody’s Investor Services said.

Affordability will likely remain high amid low interest rates and that, along with a “very high” fiscal strength supports Australia’s highest credit rating, Marie Diron, associate managing director at Moody’s Investors Service said in a note on the annual budget.

Australia’s debt has surged over the past eight years as repeated budget blowouts hit the government’s ability to rein in fiscal deficit. However, Moody’s says the debt burden and affordability are both in line with the highest rated countries.

“We expect debt affordability to remain very high, in particular as the strength of Australia’s institutions and its moderate debt burden continue to shore up domestic and international confidence in Australian assets, and maintaining a relatively moderate cost of debt,” Moody’s said.

It cautioned the affordability was vulnerable to a change in financial conditions.

And in the long term, drivers of Australia’s credit profile will include a stabilisation in debt levels, a preservation of financial stability through a potential housing correction, and the nation’s continued ability to attract foreign funding to finance its investment needs.

This chart from Moody’s illustrates how Australia’s debt burden, which was a fraction of the median debt carried by its highest rated peers, is now crossing the threshold

Moody’s expect the nation’s debt burden to rise to 42.4% of GDP in 2018 up from 39.7% 2016, with interest payments now absorbing around 4.3% of revenues, compared to less than 2% in the late 2000s.

It also sees revenue expanding slower than budget projection, a feature of the past three years. That combined with expenditure slippage will result in a wider deficit for longer.

These two charts show the risks to revenue and expenditure projections

Australia’s annual budget this week projected the deficit to fall from $29.4 billion in 2017-18 to $2.5 billion in 2019-20, with a surplus of $7.4 billion in the following year.

“We continue to expect slower revenue growth than the budget assumes,” Moody’s said. “Expenditure slippage is likely to contribute to wider deficit for longer. Delivering sustained spending restraint over another four years will prove challenging.”

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