Credit rating downgrade a 'political' risk

Credit rating downgrade a 'political' risk

Australia's AAA rating is a major talking point going into tomorrow's federal Budget, but any future downgrade will be a bigger risk for Joe Hockey than bond traders, says Nikko Asset Management.

Speaking in Sydney on Friday, Nikko Asset Management head of fixed income, James Alexander, said there is a risk that Australia could lose its AAA rating, but it’s not a strong one.

If Australia's credit rating were downgraded, it would be a “big deal for a couple of days”, Mr Alexander said.

Mr Alexander pointed out that there aren't many countries with an AA plus rating, and therefore Australia would have the highest rating of that group.

“It matters more politically than for the bond market,” Mr Alexander said.

“Whichever party is in government, I don’t think either wants to be the one when Australia loses its AAA rating." 

AMP Capital chief economist Shane Oliver said Australia’s public debt is low by international standards, but the federal government needs to provide more confidence of a return to surplus within a reasonable timeframe if Australia is to avoid a downgrade in its credit rating.

“While Australia's still low level of public debt has suggested that the risk is low, the Budget … will be the seventh in a row that has projected or implied a return to surplus within a reasonable timeframe,” Mr Oliver said.

“One could be forgiven for starting to think that such projections [and] commitments are hollow.

“While sovereign bond yields often don’t go in the direction implied by sovereign rating changes, its better not to take the risk, given the potential flow on to borrowing costs through the economy,” said Mr Oliver.

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