Australia’s credit outlook has been downgraded from “stable” to “negative” by one of the world’s pre-eminent ratings houses – and its AAA rating could be next.
The government’s three stimulus packagers – totaling more than $300 billion – will see Australia’s debt burden weaken materially, resulting in S&P Global Ratings downgrading its credit outlook from “stable” to “negative” while reaffirming its AAA rating.
“S&P’s action today, in reaffirming our AAA rating, is a reminder of the importance of maintaining our commitment to medium-term fiscal sustainability,” said Treasurer Josh Frydenberg.
“Our disciplined economic and budget management, which saw the federal budget return to balance for the first time in 11 years, meant the budget as noted by S&P ‘was on track to achieve a surplus in fiscal 2021 before the COVID-19 outbreak’.”
S&P said Australia’s economy was “well placed” to recover due to pent-up demand, low interest rates, and a large infrastructure pipeline – but flagged a downgrade if the economy didn’t bounce back as expected.
“We could lower our rating within the next two years if the COVID-19 outbreak causes economic damage that is more severe or prolonged than what we currently expect,” S&P said. “With household indebtedness at elevated levels, this could delay the process of repairing the government balance sheet beyond what we expect currently. Government indebtedness and interest costs will remain at elevated levels.”
And a possible downgrade could also have widespread consequences for Australia’s banks.
“News today that Standard & Poor’s may cut the Australian government’s prized AAA credit rating could have wider consequences for Australian companies whose own ratings are dependent on the government’s rating,” said Asmita Kulkarni, director of investment strategy at FIIG. “There is a risk of broader downgrades including the ratings of the four major banks.”
Australia is one of only 10 countries in the world to have a AAA credit rating from the major ratings houses – a group that also includes Finland, Germany, and Luxembourg.