Moody’s says the budget update is in line with Australia's triple-A credit rating, but warns on politics

Ryan PierseCity of Sydney/Getty Images

Moody’s Investors Service says the federal government’s mid year budget update puts Australia in line with other countries with a triple A sovereign credit rating.

The credit rating agency praised the federal government for being prudent with the budget, adding that economy has a strong capacity to absorb shocks, but it also warns on the difficulties with the current political equation in the parliament, where a spectrum of crossbench senators decides the fate of legislation, including budgetary measures.

“We believe that policymakers’ vigilance and effective response and the economy’s flexibility would mitigate the impact of [economic] shocks and maintain Australia’s credit metrics consistent with its Aaa rating,” says Marie Diron at Moody’s.

However, she says meeting the fiscal targets set out in the MYEFO, Mid-Year Economic and Fiscal Outlook, will be difficult in an environment of weaker economic growth.

While Moody’s has recently been strongly behind Australia’s top credit rating, Standard and Poor’s (S&P) in July placed the rating on credit watch negative from its previously stable outlook. S&P has yet to comment on the mid year budget update.

However, Moody’s today said the government is displaying “fiscal prudence” by assuming that commodity prices remain broadly unchanged.

“We also do not assume that commodity prices will continue to rise at the pace seen in recent months,” Diron says.

“With the downward revisions in the MYEFO, the government’s projections for nominal GDP growth are now broadly in line with our forecasts.

“However, with nominal GDP growth revised lower from next year onwards, achieving the revenue collection and spending restraint envisaged in the MYEFO will be challenging.”

Moody’s says it expects the budget deficits to be wider for longer than currently projected.

Gross general government debt will rise in the next couple of years to around 42% of GDP, according to projections from Moody’s.

“This is broadly in line with the median level of Aaa-rated sovereigns,” the agency says.

“Australia’s Aaa rating and stable outlook are also underpinned by very high shock absorption capacity of the economy and very strong policymaking institutions.”

Moody’s did note the difficulties in getting budget measures through the parliament.

“Legislating fiscal consolidation measures remains challenging.” Moody’s said.

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