Ratings agency Standard & Poor’s has moved Australia’s credit rating to negative outlook on concerns that the election outcome means the government will be unable to pass appropriate expenditure and revenue measures through Parliament.

While not a formal downgrade of the current rating — triple-A — the announcement means there’s a strong likelihood the agency will move to downgrade in the near future. Australia has had triple-A ratings from all three major agencies since Fitch upgraded us under Labor in 2011. The agency said:

“We are revising the rating outlook on Australia to negative from stable because 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 … The negative outlook reflects our view that without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement. Ongoing budget deficits may become incompatible with Australia’s high level of external indebtedness and therefore inconsistent with a ‘AAA’ rating.”

While it seems likely the Turnbull government will be returned, either with a one-seat majority or with the support of a conservative independent such as Bob Katter, the Senate will pose a very difficult challenge for the passage of legislation, with protectionist Nick Xenophon, and populist and doyen of conspiracy theorists Pauline Hanson likely to wield the balance of power, meaning anything opposed by Labor and the Greens will need to be negotiated with them. Standard & Poor’s, which, much more so than Fitch and Moody’s, considers political factors in its assessments of sovereign ratings, appears to be waiting to see how the House of Representatives and the Senate shape up before making its decision on a downgrade.

The announcement had a momentary downward impact on the dollar — it dipped to around 74.85 or thereabouts and then rebounded half an hour or so later to back over 75 US cents — and pushed the sharemarket lower, but it had no impact on bond yields. The 10-year bond yield remains around 1.86% to 1.87%, which is close to all-time lows (bond yields around the world are dragged lower by fears the Brexit vote in the UK has the potential to trigger a new financial crisis — starting with the Italian banking system). The switch to negative outlook will not impact Australia’s cost of borrowing money offshore.

 

Peter Fray

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