Australia’s AAA credit rating and its outlook remain strong

29 Sep 2017

Tags

  • Edmund Tang
  • Australian Economy

Major international credit agency Moody's Investors Service recently announced that Australia would retain its AAA credit rating, reflecting the country’s very high economic, institutional and fiscal strengths. The agency’s assessment of the Australian outlook is that the economy will extend its uninterrupted 26-year record of economic growth into the foreseeable future.

Moody’s assessment highlighted in particular that a very strong institutional framework — including transparent and effective monetary policy and financial regulation — underpins Australia's creditworthiness by lowering the probability and impact of potential economic and financial shocks. In addition, Moody’s noted that Australia's moderate debt burden relative to other AAA-rated sovereigns and strong debt affordability also supported its top credit rating.

However, the credit agency reiterated that in its view Australia was exposed to two major kinds of shocks: firstly, high and rising household debt exposed the sovereign to a potential downturn in the housing market that could weigh on economic growth; and secondly, the economy's long-standing dependence on external financing continued to expose the nation and its financial system to a shift in foreign investors' assessment of the attractiveness of Australian assets.

Offsetting these concerns, however, is the fact that Moody’s also noted that, in either risk scenario, the scope for monetary or fiscal policy easing, combined with strong institutions and a well-capitalised banking sector, would mitigate the negative economic and fiscal impact of the shocks.

In this context, on 26 September, the Treasurer Scott Morrison released encouraging news regarding the latest outcome of Australia’s 2016-17 federal budget in which he confirmed that the Government had brought the Final Budget Outcome (FBO) in at A$4.4 billion better than the underlying cash balance that had been forecast at the time of the 2017-18 Budget.

The underlying cash deficit was 1.9 per cent of nominal GDP in 2016-17, marking the first time in four years it has dropped below two per cent of GDP. The improvement in the bottom line was driven by A$4.1 billion in higher total receipts than had been expected at the time of the 2017-18 Budget, as well as an improvement of A$1.2 billion from payments being lower than expected.

The Treasurer also commented that Australia’s real GDP expanded by 1.9 per cent in 2016-17, slightly stronger than the 1¾ per cent growth forecast in the 2017-18 Budget. Australia’s nominal GDP rose by six per cent, consistent with the 2017-18 Budget forecast, driven by a strong rise in Australia’s terms of trade.

In the meantime, the Treasurer pointed out that almost 250,000 jobs were generated over the last financial year resulting in employment growing by 1.9 per cent through the year to the June quarter 2017, which was stronger than the 2017-18 Budget forecast of one per cent.

Overall, Australian Government general government sector (GG) net debt was A$322 billion (18.4 per cent of GDP), which was A$2.8 billion better than estimated at the time of the FY2017-18 Budget.

This latest fiscal outcome should therefore further strengthen the IMF’s current view that Australian Government’s fiscal position will remain sound and is much stronger than those of many governments in the developed world. The IMF is currently projecting that the average GG net debt of advanced economies and the G7 as a group is above 70 per cent and 80 per cent of nominal GDP respectively.

Looking forward, the IMF is predicting that Australian Government debt will fall below 16 per cent[1] of GDP by 2022, while the average net debt ratio of advanced economies will remain high at about 72 per cent of GDP. That low level of Australia’s public sector debt reinforces our Government’s healthy financial position and sound economic credentials, and continues to underpin its strong sovereign ratings.

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[1]  The consolidated level comprises the Commonwealth, State, Territory and Local Governments.