There has been plenty of hand-wringing lately about the path of the Federal Government’s debt profile given the deterioration in its fiscal position as iron ore crashes and revenue falls short of expectations even as recently as MYEFO last December.
But, Peter Jolly, NAB’s global head of research, and David deGaris, senior economist with NAB’s market team, have released a report this afternoon saying the “likelihood of Australia’s AAA credit rating being downgraded anytime soon is quite low.”
That’s because “Australia’s net debt position remains modest and the economy retains economic, monetary, and fiscal flexibility,” they added.
That’s not to give Australia a free pass however, with Jolly and deGaris adding somewhat worryingly that:
The deterioration in the fiscal position in recent years has been fairly substantial – outside of the two World Wars and the Depression, it’s the second largest deterioration since Federation.
This does at least raise the possibility that a ratings agency could send a lower level “negative watch” warning.
But the problem is not only the price of iron ore, which has become the focus of budget woes. Rather, Jolly and deGaris highlight that “last year’s Commonwealth Budget made an attempt to start on the path of medium-term repair but of course much of that reform never passed through the parliament.”
They highlight that while both parties agree a path back to surplus needs to be found, “they can’t agree on what this path should be.”
Ominously they note:
The political stalemate in the US was a significant aspect of the US’s credit rating downgrade.
That’s something both sides of politics and the independents in the Senate need to note well.
The good news is Australia’s starting point and the fact that the intergenerational report projections “suggest that net debt will peak a bit over 14% of GDP in the next few years before 1) falling modestly out to 2025 and then 2) rising sharply to reach 57% of GDP by 2055.”
By way of comparison, they note “the net debt position of the US is currently 85%”.
In the end though, while Jolly and deGaris highlight the chance of Australia being placed on negative watch are growing, they say “given Australia retains economic and monetary flexibility, and that the Commonwealth’s net debt is likely to remain well below 30% over the next decade or more, we reckon the Government still has fiscal room left before they would trigger a downgrade”.
Good news for those worried about the loss of Australia’s AAA rating. But Jolly and deGaris also note that’s not as scary as many believe.