Fitch joins other ratings agencies in budget warning to Turnbull

Ratings agency Fitch has flagged renewed policy uncertainty in the wake of the tight federal election result.

Fitch says the government’s lost ground in the Senate may “raise the risks to government policy implementation — including for fiscal consolidation”.

Fitch has become the third of the major ratings agencies to warn the Turnbull government over the difficult path of budget repair, flagging renewed policy uncertainty in the wake of the tight federal election result.

Following cautions from Standard & Poor’s and Moody’s, ratings agency Fitch said the knife-edge election result would make policy implementation “more of a challenge from the previous parliament, and raises uncertainty over the medium-term legislative agenda”.

Director of sovereign ratings Mervyn Tang said a “credible long-term fiscal consolidation strategy” remained a key ratings consideration for Australia, and said the government’s lost ground in the Senate may “raise the risks to government policy implementation — including for fiscal consolidation”.

“The inability to find political agreement has contributed to a slower pace of fiscal repair than projected in previous budgets,” Mr Tang said. “It remains to be seen whether the fiscal outlook will be altered by the new balance of power in parliament.”

Mr Tang also said the potential domestic political constraints on policymaking came at a time when the economy faced “heightened risks”, including potential external shocks from a sharp Chinese slowdown or economic risks from Europe or the US.

“Political constraints could impair the federal government from responding effectively and in a timely manner in the event of one of these risk scenarios, which could lead to a sharper downturn than necessary.”

Ratings agency Standard & Poor’s became the first ratings agency to place Australia’s prized “AAA” sovereign debt rating on “negative” watch last week after it became clear that the Coalition would not be returned to the lower house with a robust majority.

Moody’s was not as zealous as S & P, but warned the incoming Senate to overcome ideological divisions to avoid policies that would have a “negative” impact on the nation’s reputation as a borrower.

While Fitch said Australia’s credit profile remains consistent with its “AAA” rating, S & P said it foresaw a 33 per cent chance the nation’s credit rating would be cut in the next two years, which could increase the cost of government debt and the cost of money through the economy via the nation’s banks, which have a large dependence on international market funding.

The agency has also put all four bank majors on credit watch in the wake of the potential downgrade of the national downgrade.

Fitch said the lack of a strong electoral mandate could also exacerbate internal politics within the major parties and act as another source of political uncertainty.

“Australia has had six prime ministers in the past five years, with internal challenges in both major federal parties contributing to the frequent leadership changes,” Mr Tang said.