S&P downgrades Aussie outlook amid uncertain election result

Standard and Poor’s (S&P) has downgraded its outlook for Australia from ‘stable’ to ‘negative,’ saying the federal election was a major factor in the decision.

“We believe that without remedial action, the government's fiscal stance may no longer be compatible with the country's high level of external indebtedness,” S&P says.

It says without the implementation of more “forceful fiscal policy decisions” the government’s budget deficit may persist for several years with little improvement.

“The budget deficits may become incompatible with Australia's high level of external indebtedness and therefore inconsistent with an 'AAA' rating.”

S&P affirmed Australia’s 'AAA' long-term and 'A-1+' short-term sovereign credit ratings.

The account deficit will reach nearly 5% of GDP this year and only moderate slightly during the forecast horizon to just over 3%.

S&P says the outcome of the recent election – where neither of the traditional governing parties commands a majority in either the senate or the parliament – means a reduction in the deficit may be further postponed.

The Reserve Bank of Australia’s (RBA) most recent projection date for a balanced budget is in 2021.

“This is eight years later than the previous government's earlier projection of the 2013 fiscal year, which it made in 2009,” S&P says.

“If achieved, it would come more than 10 years after the global recession initially pushed the central government budget into deficit.”

S&P says low commodity prices, particularly of iron ore, as well as low inflation are persistent problems for the economy.

Nevertheless, it is upbeat on the country’s economic growth, estimating headline GDP will to grow 3% in this financial year.

“There is a one-in-three chance we could lower the rating within the next two years if we believe that Parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s,” S&P says.

But it says the ratings could stabilise if new budget savings or revenue measures were enacted that “appeared sufficient to reduce fiscal deficits materially over the next few years.”

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