Budget surplus plan ‘non-negotiable’: S&P

The agency has elaborated on its downgrade to Australia’s credit outlook, saying it’s time for the government to “step up”.

S&P yesterday said the chance of a ratings cut was at 33 per cent over the next two years. Picture: James Croucher.

The Federal Government must show clear signs of progressing toward a promised surplus in fiscal 2021 in the near-term or it will be hit with a credit rating downgrade, Standard & Poor’s has confirmed today.

The comments come after the ratings agency yesterday downgraded the outlook on the Commonwealth’s ‘AAA’ rating to ‘negative’ from ‘stable’.

The group elaborated on its views this morning, with analyst Anthony Walker saying the current pledge for a return to surplus in the 2021 financial year was now a non-negotiable.

“We are really looking for the government to stick to its latest forecast of fiscal 2021. There’s been a number of years of fiscal slippage and it’s really time for the government to step up,” he said.

“It’s a high threshold because they are a triple-A rated government at the moment.”

In its report yesterday S&P said it doubted the projections of the government, in part due to its expectation iron ore prices will be 20 per cent below the Treasury outlook.

“While we expect that fiscal deficits will improve over the medium term, we are more pessimistic about the central government’s revenue outlook than the government was in its latest budget projections,” S&P said.

“Aside from commodity prices, we also consider that there remains downside revenue risk if Australia’s inflation and wage growth is weak for longer than the budget anticipates.”

The comments preceded a report from the Department of Industry and Science today that saw iron ore price forecasts slashed 20 per cent for 2017 to $US44.80 a tonne, well below the Treasury forecast of $US55 a tonne seen in the May Budget.

Should the government division prove accurate, around $1.5bn will be sliced from Budget revenue in the year ahead compared to Treasury expectations.

The next key event S&P will be looking toward for details on government plans will be the mid-year budget update in December, with any hint of a further delay to surplus plans potentially leading to a ratings cut.

The group added that while the rating holds a negative outlook it will be reviewed at least twice a year.

S&P yesterday said the chance of a ratings cut was at 33 per cent over the next two years.

The ratings agency also lowered the outlook on the big banks yesterday, noting they would likely see a one notch ratings slide if Commonwealth debt is downgraded.

It added today the banks would each have to raise between $7 and $8 billion within two years to avoid a ratings downgrade in the case of a cut to the Commonwealth rating.

“It is possible that if these banks raise their capital up they could preserve their capital rating,” S&P analyst Sharad Jain said, but added it was “unlikely” they would avoid a simultaneous ratings cut.

The banks raised a combined $17.3 billion last year and analysts have recently warned they might need to raise a similar amount over the next couple of years to meet stricter regulatory requirements. However, $28bn-$32bn would likely be a stretch, according to S&P.

The ratings agency also weighed in on the likely impact on corporate borrowing costs, explaining businesses would feel little pain from the change to the outlook.

“We are not really expecting any major impact,” S&P analysts said.