Moody’s warns on Coalition’s slim majority

The ratings agency says the Coalition’s slim majority could threaten Australia’s credit rating.

Moody’s has added to ratings agencies’ recent warnings on the nation’s credit outlook, saying Malcolm Turnbull’s mandate to govern has been weakened by the government’s slim majority in parliament.

“The latest results indicate that the Coalition of the Liberal and National parties will govern with a weaker mandate than it has had over the past three years,” Moody’s senior vice president Marie Diron said.

“A narrow win in the House of Representatives for the Coalition, combined with the likelihood of a more splintered outcome in the Senate, is credit negative for the sovereign because it will challenge the government’s ability to implement measures aimed at curbing the budget deficit,” she said.

The notice follows a warning from Fitch yesterday, which became the third of the major ratings agencies to caution the Turnbull government over the difficult path of budget repair, flagging renewed policy uncertainty in the wake of the tight federal election result.

Ms Diron, who authored Moody’s warning in April that Australia’s triple-AAA credit rating was under threat, thanks to a lack of revenue measures flagged by Mr Morrison ahead of the government’s May budget, has since said the measures aimed at increasing government income were “relatively limited”.

“The Coalition previously proposed several measures aimed at reducing the budget deficit, including restricting tax advantages on superannuation contributions and restraining health, education and welfare spending,” Ms Diron said. “However, despite broad political consensus around the desirability of returning the budget balance to surplus, authorities have had difficulty implementing specific measures to achieve this.”

“The Coalition’s now-narrower majority threatens to add to these challenges.”

Moody’s also today warned on growing headwinds to Australia’s big four banks, saying they were increasingly vulnerable to economic shocks.

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

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. However, The Reserve Bank of Australia’s head of stability Luci Ellis this week played down any potential fallout from the loss of the credit rating.