There is a one in three chance of Australia receiving a sovereign ratings down grade, according to S&P.
Credit rating agency Standard and Poor’s (S&P) has placed Australia’s AAA rating on credit watch negative from its previously stable outlook.
While S&P also said it had “affirmed our ‘AAA’ long-term and ‘A-1+’ short-term unsolicited sovereign credit ratings on Australia” the move to a negative outlook does imply Australia is now at a heightened risk of losing its AAA rating.
Worth noting too that S&P indicate that states and major banks are also on watch, which is logical considering that these entities rely directly or indirectly on Federal Government support, and a reduction in the rating of the “peak” body would flow through, leading to potentially higher funding costs. “The negative outlooks on these banks (Commonwealth, Westpac, ANZ and NAB) reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia,” S&P said.
S&P said in a statement accompanying the announcement that:
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.
Crucially S&P says it is “more pessimistic about the central government’s revenue outlook than the government was in its latest budget projections”.
In a strong message to both side of the political fence S&P said that because Australia carries a high level of net external debt “Australia’s general government sector fiscal outcomes need to be stronger than its peers’, and net debt needs to remain lower, to remain consistent with the current ‘AAA’ rating”.
That’s sounds ominous and S&P notes that “Australia’s external debt net of public and financial sector assets (our preferred stock measure) is over three times current account receipts (CARs)”. They also highlight that the current account deficit of 5% of GDP this year will “only moderate slightly during the forecast horizon to just over 3%”.
As a result “Australia’s 2016 gross external financing requirement of US$630 billion is over half of GDP,” S&P said.
That sounds ominous but S&P expects “Australia’s external borrowers to maintain easy access to foreign funding”.
Summing up what all of the above and the change to negative outlook means S&P said (our emphasis):
There is a one-in-three chance that we could lower the rating within the next two years if we believe that 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.
The dollar reacted to the announcement, but has recovered somewhat since.
