In a note summarising the rationale behind Australia’s ‘AAA stable’ credit rating, Moody’s laid out both the strengths and the “challenges” facing the government in the short-term.
On the positive side, Moody’s pointed to Australia’s economic resilience in an “uncertain global environment”, the country’s “robust” institutional framework and Australia’s strong fiscal metrics as compared with global peers.
But the Australian banking sector and economy remain more susceptible to ‘event risks’ than similar countries, Moody’s warned.
The main problem, according to the ratings agency, is the rapid appreciation of house prices and the accompanying ramp-up in household debt in recent years.
With household debt sitting at 123 per cent of GDP, the Australian economy and financial system is “vulnerable to negative shocks”, said Moody’s.
Australia’s household debt is currently higher than in the US, Ireland and Spain in 2007 prior to their respective pre-GFC house price peaks, said the note.
“We have adjusted the Banking Sector Risk score to ‘Very Low’ from an indicative ‘Very Low -‘ to reflect banks’ high exposure to mortgages amid increasing household leverage, and potential for a housing downturn,” said Moody’s.
Moody’s is also concerned that the Australian government’s dependence on external funding is another “source of vulnerability”, given that it exposes the domestic financial systems to global shocks.
For now, Moody’s AAA rating reflects the fact that the government’s policy response to potential shocks will work as a buffer to the economy.
However, any evidence that the economy’s resilience to negative shocks is diminishing would put downward pressure on the current “AAA stable” rating, said Moody’s – “particularly if it significantly curbed access to or raised the cost of international financing for the government or banks”.
“Moreover, indications that the hurdles to fiscal consolidation are higher than we currently expect, leading to a materially faster deterioration in fiscal metrics, would also put downward pressure on the rating,” said Moody’s.
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