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Here's what worries the ratings agencies about Australia's political chaos

A Giant African Snail. ERRY SHERIDAN/AFP/Getty Images

The too-close-to-call election at the weekend is being watched closely by ratings agencies which must decide whether Australia can keep its gold AAA stamp of fiscal approval.

The key judgement for keeping the rating is whether the new government will have the same drive to reduce the deficit and whether the numbers in the Senate will mean that budget savings measures are blocked or not.

Standard & Poor’s says the lack of a clear outcome has decreased visibility on the future of the country’s fiscal position.

“As we’ve previously noted, improving budget balances remain important to the AAA rating to offset Australia’s high vulnerability to shifts in offshore financial market sentiment,” says S & P.

“Our current stable rating outlook on Australia is based on our assumption that Australia’s conservative budgetary policies will continue and result in consistently narrowing deficits over the forecast horizon, maintaining the general government debt near or below current levels.

“Irrespective of the political composition of any new government, we could lower the rating if parliamentary gridlock on the budget continues and Australia’s budgetary performance does not improve broadly as we expected a year ago.”

Mervyn Tang, director of the Asia-Pacific sovereigns group at Fitch, says the agency will assess the government’s ability to manage public finances prudently when the election result is known.

“The results of the Australian Federal Election remain unclear, with a hung parliament a possibility,” he says.

“The close contest could mean a fiscal outlook and set of policies significantly different to those set out in the FY2017 Budget, with negotiations potentially necessary to implement key policies.”

Fitch views Australia’s overall credit profile as still consistent with a AAA rating.

“But political gridlock that leads to a sustained widening of the deficit would put downward pressure on the rating, particularly if the economic environment deteriorates,” says Tang.

Moody’s has said Australia’s finances are vulnerable to shocks, including a downturn in the housing market and a sudden rise in the cost of borrowing.

And the ratings agency estimates the budget deficit will take longer to fix that the government forecasts because lower commodity prices, muted corporate profitability and low wage growth will continue to weigh on tax collection.

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