Moody’s allays triple-A rating concerns

Australia’s triple-A rating is not under immediate threat, but agencies have put policymakers on notice.

Analysts have warned Australia’s triple-A credit rating is at risk of being put under negative watch.

Australia’s precious triple-A rating is not under immediate threat from the uncertain election result, but ratings agencies have put the nation’s policymakers on notice.

Sounding the loudest alarm was Standard & Poor’s, which said the murkier political waters clouded its outlook for Australian fiscal policy.

“The lack of a clear outcome in the Australian federal election over the weekend has decreased visibility on the future of the country’s fiscal position,” S&P said in a statement.

“Our current stable rating outlook on Australia is based on our assumption that Australia’s conservative budgetary policies will continue and result in consistently narrowing deficits over the forecast horizon, maintaining the general government debt near or below current levels.”

Earlier, in a brief statement, Fitch Ratings said the potential for inaction in Canberra was a risk factor it would be watching closely.

“Fitch views Australia’s overall credit profile as still consistent with a ‘AAA’ rating, but political gridlock that leads to a sustained widening of the deficit would put downward pressure on the rating, particularly if the economic environment deteriorates,” Fitch director, Asia-Pacific sovereigns group, Mervyn Tang said.

Also today, Moody’s said the primary risk to its ‘Aaa’ rating would come if the sworn-in party showed a lack of interest in returning the budget to surplus over the medium-term.

“Short-lived political uncertainty would have limited credit implications for Australia,” Moody’s senior vice president Marie Diron said.

“The electoral outcome would affect the sovereign credit profile only if it changed broad policy priorities and the effectiveness of their implementation.”

The news drove a rebound in the Australian dollar after it had been seen slumping on the political uncertainty this morning.

At 12.30pm (AEST), the local currency traded at US74.97c, up from US74.65c this morning.

Australia has held the Aaa rating with Moody’s — its top mark — since October 2002.

The nation’s sovereign debt has also had the top rating at rival Standard & Poor’s for a similar amount of time, with an upgrade to “AAA” seen in February 2003.

At Fitch it has held the top rating for a considerably shorter period, having been upgraded in November 2011.

The largely reassuring comments from Moody’s and Fitch come after economists had warned on the potential threat to the nation’s debt ratings from a possible hung parliament.

Capital Economics chief Australian economist Paul Dales said the prospect of a hung parliament would call into question the potential to pass key measures to cut spending, with ratings agencies potentially forced to react swiftly.

“A minority government is unlikely to pass the fiscal measures required to satisfy the ratings agencies,” he said.

“They may even pull the plug this week.”

Similar sentiments were put forward by HSBC chief economist Paul Bloxham who warned the lack of a strong majority would weigh on the chances of meaningful reform.

“That presents a risk for our current credit rating,” he said.

The Coalition, led by Malcolm Turnbull, could yet reach a majority, but this is seen as an unlikely outcome.

Moody’s has recently put the Commonwealth on notice for a potential shift to a negative outlook, warning in April the government needed to do more to lift revenues in the wake of the end of the mining boom.

“Limited spending cuts are unlikely to meaningfully advance the government’s aim of balanced finances by 2021, and government debt will likely continue to climb, a credit negative for Australia,” Ms Diron said in April.

The group saw little in the way of revenue-raising measures in the May federal budget, but resisted the temptation to put the country on negative watch.

Today, Ms Diron said the agency remained optimistic the nation’s political leaders, whoever they may be in a couple of weeks, will press forward with medium-term plans to return the Budget to surplus. They also see no near-term threat to growth from the political unease.

“Moody’s expects fiscal consolidation to remain a key policy objective of the new government, when it is formed,” she said.

“Economic momentum is likely to remain robust.

“Looking ahead, trends in Australia’s credit profile will be determined by whether fiscal objectives are effectively implemented, whether external financing conditions remain favourable and how housing market developments affect domestic growth and financial conditions.”