Standard & Poor’s today reaffirmed its AAA credit rating for Australian government debt, while maintaining its negative outlook.
The global ratings agency said that Australia’s strong institutions and well-developed economy provided grounds to maintain the AAA rating:
Along with strong institutions, a credible monetary policy, and floating exchange-rate regime, Australia’s public finances traditionally have been a credit strength for the sovereign rating. More recently, however, they have weakened. Australia’s fiscal position has continued to weaken with successive governments since the global financial recession of 2008-2009 and the peak in export commodity prices in 2011, delaying an eventual return to budget surpluses.
However, it expressed considerable doubt that Australia can return to surplus by 2020-21, in line with the government’s current objective:
The central government’s current projection date for a balanced budget in fiscal 2021 (the year ending June 30, 2021) is eight years later than the previous government’s 2010 projection of fiscal 2013. If achieved, it would come more than 10 years after the global recession pushed the central government budget into deficit. This substantial delay in fiscal repair, and the risk of further delay, raises our doubt over the ability of the Australian government to meet its fiscal objectives.
In explaining its negative outlook, S&P highlighted Australia’s large current account deficit. It also expressed concern about fiscal challenges ahead as Australia’s government tries to prop up economic growth while also trying to reduce government debt in the medium-term:
The negative outlook on Australia reflects our view that if downside risks to government revenue materialize, then budget deficits could persist for several
years, with little improvement, unless the parliament implements more forceful fiscal policy decisions. We believe Australia’s high level of external indebtedness creates a high vulnerability to major shifts in foreign investors’ willingness to provide capital, and we consider that strong fiscal performance and low government debt are important to help ameliorate this risk. Strong fiscal accounts are also a precondition for counter-cyclical policies to stabilize the economy if needed, such as in the case of a slump in the buoyant housing market
S&P said that if Australia shows signs that it will be unable to return to surplus by the stated timeframe of 2020-21, that could lead to a ratings downgrade:
The outlook has been negative since July 2016. We could lower our ratings within the next two years if we were to lose confidence that the general government fiscal deficit will revert into surplus by the early 2020s. A strong fiscal position is required to offset Australia’s weak external position. It is also needed to allow for a strong buffer to absorb the fiscal consequences if the ongoing boom in the credit and housing market were to abruptly end. While our base case is for a soft landing, our ratings could come under pressure if an undiminished continuation of the unsustainable credit expansion were to continue. We believe the fast and sustained growth in credit and house prices will increase risks to fiscal accounts, real economic growth, and financial stability.
It concluded that for the outlook to stabilise, there needed to be more evidence of medium-term budget improvements and a meaningful stabilisation of house prices:
The ratings could stabilize if we were to see a significant and sustained improvement in the medium-term budget outlook, leading to a return to a
general government surplus. A stabilization of the ratings would also require a meaningful moderation of the credit and house price boom.