Treasurer Scott Morrison is likely to avoid a credit rating downgrade immediately following his MYEFO statement on Monday, but Australia could still lose its AAA status in the the first half of 2017, says BlackRock.
Speaking in Sydney yesterday, BlackRock head of fixed income Steve Miller said Standard & Poor's and Moody's are unlikely to downgrade Australia's sovereign debt from AAA to AA+ immediately following Monday's Mid-year Economic and Fiscal Outlook (MYEFO) announcement.
But he didn't rule out a downgrade if there is a "big deterioration" in the budget bottom line in Treasurer Scott Morrison's MYEFO on Monday, 19 December.
Nevertheless, the government shouldn't feel confident it has "crossed the finish line" if it avoids a downgrade on Monday, Mr Miller said.
"If there's not a downgrade as a result of the MYEFO it will very much depend on what we see in terms of the May 2017 budget," he said.
"We don't anticipate that the budget picture has improved that much."
If anything, the budget bottom line has "probably deteriorated", notwithstanding the increase in commodity prices throughout 2016, Mr Miller said.
"Wages growth has been a lot lower than people anticipated. And if wages growth is a lot lower than people anticipated, income tax receipts are a lot lower than people have anticipated," he said.
"That's probably going to have a bigger impact – certainly in the shorter term – than higher commodity prices."
The ratings agencies are also concerned about Australia's high levels of household and foreign debt, said Mr Miller.
In addition, the current make-up of the Senate makes it very hard for any government (Labor or Coalition) to enact spending cuts, he said.
"Just because it doesn't occur in the immediate wake of the MYEFO doesn't mean that it won't occur at some stage in the first half of 2017," Mr Miller said.
Australia was put on 'negative outlook' following the 2016 federal budget by S&P, with a one-in-three chance of a downgrade.