A vote of confidence: Australia retains AAA rating
25 Sep 2018
In September 2018, Standard & Poor’s (S&P) Global Ratings revised its outlook on the long-term ratings for Australia from negative to stable and reaffirmed its AAA sovereign credit rating.
The credit agency’s decision is a strong vote of confidence in Australia’s economic outlook as well as the Australian Government’s overall financial strength in an increasingly uncertain global business environment. Australia is one of only 10 economies around the world which enjoys a AAA credit rating from all three leading credit rating agencies: S&P, Moody’s and Fitch.
S&P noted the positive outlook reflects its expectations that Australia’s general government fiscal balance will return to surplus by the early 2020s. The agency expects that ‘steady government revenue growth supported by the strong labour market and relatively robust commodity prices, to be accompanied by expenditure restraint.’ S&P also anticipates Australia’s residential property prices will continue their orderly unwind, and that ‘this slowdown won't weigh heavily on consumer spending and the financial system’s asset quality’.
According to S&P, improved labour market conditions and commodity prices over the next few years will help lift government revenues. The negative effect of falling mining investment has also further diminished. S&P added that while resources investment remains soft, mining export volumes will be sustained as new capacity is brought on-line. The major Australian dollar depreciation up to 2016 has also stimulated services exports, particularly in education and tourism.
Australia is a high income and diversified economy, and has shown consistent growth. Economic resilience and flexibility helped cushion Government finances from economic shocks and underpin creditworthiness.
Along with Australia’s sound institutions, a credible monetary policy, a floating exchange-rate regime and a strong banking system, S&P observed the country’s public finances traditionally have been a credit strength for the sovereign rating.
The credit agency noted the Australian Government has demonstrated a willingness to implement reforms to sustain economic growth and ensure sustainable public finances, and has a strong track record from managing past economic and financial crises. Its commitment to a return to fiscal surplus reduces the risks of significant increases in planned spending.
S&P also praised Australia’s strong respect for the rule of law, a free flow of information and open public debate of policy issues.
However, S&P warned that Australia’s economy, while wealthy, resilient and performing soundly, could be vulnerable to major shifts in international capital flows. S&P noted the Australian economy carries a high level of external debt, exacerbated by typically high current account deficits, volatility in the terms of trade, and a large stock of short-term external debt.
Offsetting these concerns, however, is the fact that Australia’s external debt is mostly generated by the private sector and reflects productive investment opportunities; foreign investor confidence in the country’s rule of law; and the high creditworthiness of its banking system.