Australia’s AAA Credit Rating at risk of future downgrade

Published at Dec 20, 2016, in Features

Australia has managed to hold onto its AAA credit rating following a disappointing mid-year budget update.

Originally Scott Morrison, Australia’s treasurer, submitted the 2016 federal budget on the 3rd May 2016 showing a deficit of only $37.1 billion, with a plan to be back in the black by 2021.

However lower company profits and a drop in wage growth below 2% are two of the leading factors impacting the odds of the government’s plan in returning to surplus.

This showed up in recent GDP figures in which the Australian economy shrank by half a percent during the September quarter.

Expectation for this year’s deficit is now out to $40 billion, with the 2017/18 budget likely to see a $30 billion deficit instead of the originally forecast $26 billion.

Should Australia be downgraded to a AA rating, borrowing costs on trillions of dollars of debt will rise.

This includes the interest on the debt that the Australian government needs to pay back regarding bonds.

Working in the government’s favour nonetheless is the recent recovery in commodity prices.

The officials in Canberra will be hoping that the rise in prices is more than just a temporary correction as our market, and budget, is largely dependent on it.

Dodged the bullet for now

Ratings agency Moody’s and Fitch have maintained Australia’s AAA rating for now, stating that the government has been proactive in trying to bring the budget into line and that the economy has the capacity to absorb any shocks should they occur.

Moody’s did issue a warning that playing politics may have in passing budgetary measures, also stating that according to projections, gross general government debt is likely to rise over the coming years to approximately 42% of GDP.

This figure being in-line with other AAA rated sovereign nations.

It should be noted that ratings agencies have lost their ability to forecast future events as was seen in the 2008 GFC.

Whether they have regained their touch remains to be seen.

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