S&P Global Ratings ‘pessimistic’ on budget deficit

S&P Global Ratings ‘pessimistic’ on budget deficit

The Australian government’s mid-year budget update has done little to restore confidence in the country’s ability to maintain its AAA credit rating, according to S&P Global Ratings.


The ratings agency said the Mid-Year Economic and Fiscal Outlook (MYEFO), issued by Treasurer Scott Morrison, showed a “worsening forecast fiscal position”.

While the company said the deteriorating forecast had “no immediate effect” on the country’s credit rating, S&P Global Ratings cautioned that it “further pressures” Australia’s currently negative credit rating.

“We remain pessimistic about the government's ability to close existing budget deficits and return a balanced budget by the year ending June 30 2021,” the company said.

“Over the coming months, we will continue to monitor the government's willingness and ability to enact new budget savings or revenue measures to reduce fiscal deficits materially over the next few years.”

RMIT University professor of institutional economics Sinclair Davidson wrote in a piece for The Conversation that “the poor budget figures should be no surprise”, warning that Australia’s credit rating is still at risk.

“While the AAA rating remains intact for now, we should not be surprised that a downgrade remains a real possibility,” he said.

“Our friends in Canberra have no idea how to return the budget to surplus. This lack of imagination and initiative is bipartisan. Losing the AAA rating would be a lagging indicator of a continued, sustained and persistent failure to rein in spending and restore the budget to surplus.”

Despite this, Moody’s Investors Service said the MYEFO update maintained a “credit-positive commitment to returning the budget to a surplus in fiscal 2021”, adding that “Australia’s moderate debt burden gives the government flexibility as it manages the transition from resource investment-led output to a broader-based economic structure”.

“The economic assumptions underpinning the MYEFO are broadly in line with our projections,” the company said.

“In particular, compared with the pre-election outlook, the government has revised down its forecast for nominal GDP growth to 3.75 per cent in fiscal 2018 and 4.25 per cent in fiscal 2019.”

Moody’s said that while government debt is likely to grow to 41.9 per cent of GDP in 2018 and budget deficits are likely to be “somewhat wider for longer” than currently projected, this would still be in line with the median for other AAA rated economies.

“Vulnerabilities include potential for a correction in the housing market that could have a negative impact on the economy and the financial sector, and possible shifts in global capital flows that could reduce the availability of external financing,” Moody’s said.

“However, we believe that policymakers’ vigilance and effective responses, and the economy’s flexibility would mitigate the impact of any such shocks, and keep Australia’s credit metrics consistent with its AAA rating.”

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S&P Global Ratings ‘pessimistic’ on budget deficit
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