Australia scrapes a pass from ratings agencies in latest budget test

Written on the 20 December 2016

AAA credit rating safe for now, but Australian Government warned after MYEFO
By business reporter Michael Janda

The Government's Mid-Year Economic and Fiscal Outlook (MYEFO) has passed muster with all three ratings agencies, but the nation's AAA credit rating is now hanging by a thread.

Fitch and Moody's came out early to reaffirm Australia's prized AAA sovereign debt rating, but Standard & Poor's took its time, releasing its assessment three hours after MYEFO was handed down.

Unlike the other agencies, S&P has Australia on a negative rating outlook, meaning a downgrade is a real possibility.

While the agency said a downgrade over the next two years was a one-in-three possibility when it announced the negative watch in July, it seems those odds have risen substantially.

"The Government's worsening forecast fiscal position, as outlined in its latest budget projections earlier today, further pressures the rating," S&P warned.

"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.

"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."

The subtext in this message is clear find more savings or revenue by the May budget or be downgraded thereafter.

 

Key economic forecasts too optimistic: analysts

The Government clearly got some brownie points from the agencies for its relatively conservative forecasts on commodity prices, where it forecast a decline from recent highs over the coming year.

The associate managing director of Moody's Investors Service Marie Diron said that move "denotes credit-positive fiscal prudence".

However, Moody's was also far from giving the budget update a glowing endorsement, again raising doubts about whether Treasury's forecasts would be met.

What are credit ratings?

How does Australia rate compare to other countries and will a credit downgrade actually affect us?

"With nominal GDP growth revised lower from next year onwards, achieving the revenue collection and spending restraint envisaged in the MYEFO will be challenging," Ms Diron cautioned.

"In particular, maintaining lower projected payments will be difficult in light of sizeable commitments in non-discretionary areas such as health, education, social welfare."

Private sector analysts have also cast doubt on some of the key economic forecasts in MYEFO.

Economic forecaster BIS Shrapnel's senior manager of infrastructure and mining, Adrian Hart, said while the Government's commodity price forecasts may be relatively conservative, its mining investment forecasts (revised up from the Pre-election Fiscal Outlook) are too optimistic.

"The decline of only 12 per cent in mining investment in 2017/18 looks too small. There is still a substantial fall coming through in oil and gas investment," he explained.

The Government is forecasting a 21 and 12 per cent decline over the next two years, BIS Shrapnel expects a 26 per cent slide this year, 24 per cent next and 17 per cent in 2018-19.

It said there might be a small rise in 2019-20, but that still leaves a long time until the trough.

BIS Shrapnel is also more pessimistic on housing investment, which the Government is expecting to surge this year before still growing 0.5 per cent from record highs in 2017-18.

"We don't expect growth in housing investment to be as strong as Treasury's numbers in 2016/17 (though it will still be positive) and expect a decline in housing investment overall in 2017/18 (perhaps falling up to 5 per cent) and are forecasting it to get worse in the subsequent year," Mr Hart warned.

In fact, Moody's said outright that it does not believe the Treasury's forecasts and projections.

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