Risks to Australia’s AAA credit rating

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Australian Economy

Credit Ratings are generally ratings that are bestowed on an entity, which seeks to borrow some money for business requirements. This can also be done for governments to assess their creditworthiness and can help evaluate debt or financial obligations. It gives lenders an easy way of seeing how likely they are to get repaid. In doing so, credit rating agency like Standard & Poor’s (S&P), Moody’s, or Fitch come into picture. In general, ratings are provided under several grades and the scale has AAA as the highest rating down through to C, and rating below BB is deemed as junk.

As per the recent developments, the Australian government has pledged to deliver a small surplus in 2020/21, ending more than a decade of deficits that have threatened its top-notch credit rating. Both Moody’s and Fitch welcomed the government’s economic blueprint, adding the budget had no major impact on ratings. Australia is one of only 10 nations in the world with an AAA credit rating from the top three agencies. However, the recent update from S&P, which retains its negative outlook has given some jitters to the economic experts. The credit rating agency has highlighted that the substantial delay in fiscal repair, and the risk of further delay, ignites concerns about Australia’s ability to meet its objectives. In fact, low wage growth and inflation pose a downside risk to the government’s current projections.

Data showed Australian wage growth stuck at its slowest pace on record, while consumer sentiment faltered in May, putting a lid on consumer spending and a drag on the course of inflation. Last year, S&P already saw risks in the booming housing market, mainly in Sydney and Melbourne where median property prices nearly doubled since 2009. Though situation has reversed now, but risks in the housing market do hover around every now and then. At the same time, bank credit to households were seen jumping to a record high of 175 percent of gross domestic product (GDP) about one year ago. S&P sees the credit-to-GDP ratio climbing to 188 percent in 2020, and such rapid credit growth is said to lead to vulnerabilities from various perspectives, including financial, fiscal, and economic stability if the dynamic expansion experiences a sudden and unexpected slowdown.

Australia’s A$1.7 trillion economy has, in recent months, benefited from higher prices for iron ore, its top export earner. The economy grew at 2.4 percent in 2016, extending a run of 101 quarters without a recession. Last year, S&P expected headline GDP growth to be around 2.3 percent in 2017 and which was thought to accelerate to around its “potential growth rate” in the following years. That was lower than the government’s budget forecast of 2.75 percent in 2017/18 and strengthening to 3 percent through to 2020/21.

Thus, numerous uncertainties seem to be weighing on the credit rating while Australia’s possession of holding ‘AAA’ credit rating may also come under pressure from the Royal Commission into the financial system.


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