The Australian dollar has slid and shares have pared gains after Standard & Poor’s downgraded its outlook on Australia’s AAA credit rating to “negative”.
Australia’s sovereign debt still holds the top rating from all three major ratings agencies, but S&P now warns the country needs to take drastic action to remedy its budget, lest it potentially suffer a ratings downgrade.
The negative outlook on Australia reflects our view that without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement. Ongoing budget deficits may become incompatible with Australia’s high level of external indebtedness and therefore inconsistent with a ‘AAA’ rating.
Owing to the deadlocked outcome of the July 2 general election that has yet to hand either of the major parties an outright majority in either the upper or lower houses of parliament, the agency said it believes “fiscal consolidation may be further postponed.”
S&P is complimentary on aspects of the Australia economy and financial system, such as Australia’s external borrowers maintaining easy access to credit markets, the strength of the banking system and monetary policy credibility.
Australia is one of only a handful of sovereign borrowers to enjoy the highest credit rating from all three major agencies – S&P, Fitch and Moody’s Investors Services. That pool of triple-A borrowers has dwindled since the financial and European sovereign debt crises of recent years, making Australian debt a standout choice for investors seeking high-quality debt.
But the agency is clearly more sanguine on the prospects of Australia delivering fiscal outcomes that are stronger than its peers.
There is a one-in-three chance S&P could downgrade Australia’s “AAA” credit rating over the next two years if “parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s” or if Australia’s current account deficits remain high or terms of trade weaken.
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