Moody's keeps Australia's triple A credit rating despite rising debt

Australia’s Tom Burton celebrates winning a gold medal in the Men’s Laser class at the Rio Olympic Games. Clive Mason/Getty Images

Moody’s Investors Service today affirmed Australia’s Aaa sovereign credit rating.

Australia kept the rating despite the increase in government debt, which Moody’s expects to keep increasing. However, the ratings agency believes the nation can afford this.

Standard and Poor’s last month placed Australia on credit watch negative from its previously stable outlook.

Today Moody’s affirmed the Aaa government issuer ratings and maintained a stable outlook.

Moody’s says it expects Australia’s economic resilience will endure in an uncertain global environment.

Australia also has a very strong institutional framework and stronger fiscal metrics than many similarly rated countries.

However, Moody’s notes that Australia’s reliance on external financing, elevated household debt and rising residential property prices pose risks.

The stable outlook on the rating reflects Moody’s expectations that policy vigilance and response to these risks will be effective, and Australia’s sovereign credit profile will remain resilient to these risks.

“Australia’s large size, high income levels, competitiveness, flexibility and growth record combine to offer exceptional economic strength which supports the Aaa rating,” says Marie Diron at Moody’s.

“The economy is quickly and effectively adjusting to lower commodity prices that have dampened a significant source of revenues and incentives to invest.”

As a result of the deterioration in terms of trade, nominal GDP growth has slowed and Moody’s expects it to remain moderate in the next few years.

However, with a flexible labour market, a rapidly adjusting exchange rate and low interest rates, some services sectors, in particular tourism, education and housing construction have grown rapidly, creating jobs and supporting incomes in the economy.

Moody’s expects real GDP growth to remain robust, at 2.5% from 2017 onwards, after 2.8% in 2016.

The agency forecasts government debt to rise to close to 41% of GDP by fiscal 2017 and to just under 45% by the end of the decade.

However, Australia’s debt burden will remain consistent with a Aaa rating. For example, the debt burden will be lower than some other Aaa-rated sovereigns such as Canada or the Netherlands and not significantly higher than Sweden’s or Denmark’s.

“We also expect debt affordability to remain very high, with interest payments broadly stable at around 4.5% of general government revenues,” says Diron.

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