S&P cuts outlook on Aussie credit rating

Negative outlook reflects view that budget deficit won't improve

SYDNEY • S&P Global Ratings cut the outlook on Australia's AAA credit rating to negative from stable as it warned that the prospect of fiscal policy gridlock could thwart government attempts to rein in a budget deficit.

The agency acted following last Saturday's federal election, which has not delivered either Prime Minister Malcolm Turnbull's Liberal- National coalition or the main opposition Labor Party a strong mandate, potentially weakening the eventual winner's ability to push through fiscal savings measures.

"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," S&P said in a statement yesterday.

There is a "one-in-three chance that we could lower the rating within the next two years", the credit assessor said.

The nation's 10-year bond yield remains close to the record low of 1.84 per cent it touched on Wednesday, while the currency was little changed despite initial volatility.

The Australian dollar weakened by as much as 0.7 per cent to 74.67 US cents following the statement before rebounding to 75.05 US cents as of 5.12pm in Sydney. The 10-year yield was 1.87 per cent.

"The fact the rating wasn't actually downgraded was positive," said Mr Jason Wong, a currency strategist at Bank of New Zealand in Wellington. "By global standards, Australia is a very strong credit."

S&P's decision to shift its outlook on Australia comes as the nation faces a decline in tax revenues amid a drop-off in commodity prices and mining investment.

While the government has sought to chart a path back to surplus, budget deficit projections have been repeatedly revised higher and measures to curtail the shortfall have been stymied in Parliament.

Australia was last stripped of its top ratings by S&P and Moody's Investors Service in 1986, the year then-Treasurer Paul Keating warned that the nation was at risk of becoming a "banana republic". Moody's restored the top tier score in October 2002, with S&P following in February 2003.

Fitch awarded Australia an AAA ranking in 2011, and the country is currently one of just 10 to hold the highest score from all three major assessors - for now.

S&P warned the AAA could be lost if it believes "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".

Given the outcome of the election "in which neither of the traditional governing parties may command a majority in either House, we believe fiscal consolidation may be further postponed", it said.

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A version of this article appeared in the print edition of The Straits Times on July 08, 2016, with the headline 'S&P cuts outlook on Aussie credit rating'. Print Edition | Subscribe