Moody’s retains stable outlook for Australia’s credit rating

Ratings agency Moody’s has refused to follow rival S&P, which had shifted Australia to a “negative” outlook.

Ratings agency Moody’s has retained a stable outlook for Australia’s Aaa credit rating as it spruiked the “quick” and “effective” adjustment away from a resources-driven economy.

After its latest review of the nation’s prized top debt rating, Moody’s was unwilling to follow rival agency Standard & Poor’s in shifting to a “negative” outlook as the nation’s fiscal metrics were seen in line with peers and conducive to a Aaa rating over the “medium term”.

S&P became the first agency to place the country’s rating on “credit watch negative” in July as it fretted about government inaction in the wake of the election, signalling a 33 per cent chance of a ratings cut in two years.

Moody’s appears significantly less bearish, as it said Australia’s government debt to GDP ratio of 36.1 per cent in fiscal 2015 was lower than the 38.1 per cent average among Aaa-rated sovereigns, despite a sharp jump in debt since the financial crisis.

The ratio has surged from 19 per cent since fiscal 2010 and is expected to climb toward 45 per cent by the end of the decade as the Turnbull government struggles to clear measures to improve the budget through a hostile Senate.

“Moderate nominal GDP growth will continue to dampen government revenues while the government faces political hurdles to the implementation of fiscal tightening measures, as it rules with a very thin majority in the House of Representatives and a splintered Senate,” Moody’s Investors Service senior vice president Marie Diron said.

“The effectiveness of fiscal policy may be undermined somewhat.

“However, Australia’s debt burden will remain consistent with a Aaa rating, albeit rising and no longer low.”

Ms Diron said even if its expectations of rising debt come to fruition, the burden was likely to remain below peers such as Canada and The Netherlands.

Despite this, the global ratings body warned high house prices and a dependence on offshore funding posed potential threats to the nation’s rating if not kept in check by authorities.

“Moody’s notes that Australia’s reliance on external financing, elevated household debt and rising residential property prices pose risks,” Ms Diron said.

“The stable outlook on the rating reflects Moody’s expectations that policy vigilance and response to these risks will be effective, and Australia’s sovereign credit profile will remain resilient to these risks.”

Moody’s said it thought Australia would prove resilient in the face of potential shocks, however, thanks to a robust financial system as well as the prospect of monetary and fiscal stimulus.

Unlike much of the developed world Australia’s central bank maintains a cash rate comfortably above 0 per cent, although it is at a record trough of 1.5 per cent and tipped to go lower, while the nation’s debt levels are below much of its peers allowing for fiscal stimulus if the need arises, according to Moody’s.