Australia’s AAA international credit rating has been reaffirmed by rating agency Standard & Poor’s (S&P).
In a statement yesterday the group said a strong political will to bring the budget back to surplus whoever eventually wins power, was one of the considerations behind the decision to continue the rating at the highest level.
In fact the statement rebuts comprehensively the campaign run by the Opposition in the recent federal election about the level of debt and the size of the deficit.
S&P says that Australia has ample capacity and commitment to returning the budget to surplus and reducing the deficit.
It also lays to rest the scare campaigns run on our housing "bubble".
Moody’s has Australia at a similar level, but the Fitch agency, the third, has us at a slightly lower level.
"We believe that a strong political commitment to fiscal consolidation … will continue regardless of which major party leads the government that emerges from the August general election," the rating agency said yesterday.
"In our opinion, this commitment will be supported by strong bipartisan political and community support for conservative public finances and stable political consensus on fiscal, monetary, and exchange rate policies."
It said the rating is also supported by low government debt, strong institutions and transparency in economic decision-making.
"We also note that there is considerable scope for the government and central bank to provide further stimulus, if required," it said.
The outlook for Australia’s rating is stable.
However, S&P said the risks to this outlook stem from potentially sharply lower resources export prices and house prices, although this appears contained at present.
(They are also risks the Reserve Bank has highlighted in its most recent Statement of Monetary Policy on August 6.)
S&P said that while Australia’s government sector finances are not strained, private sector balance sheets, particularly in the banking system, also carry a high level of external debt that is a weakness compared with its peers.
“Still, while Australia’s banking system has been affected by the financial turmoil of the past two years, unlike some peers it has not required government recapitalisation and has remained profitable and adequately capitalised.
“It has also maintained good asset quality by international standards.
"The Australian economy outperformed every major OECD in fiscal 2009, partly thanks to the cumulative effects of fiscal stimulus, the strength of the mining sector, 30 years of microeconomic reforms, low wages growth, and a sound and rising savings rate," it said.
"With still-sluggish household consumption, the economy’s continued recovery depends mainly on the strength of global recovery and support from regional trading partners, particularly China."
But S&P pointed out that while the risks were there: "We expect strong commodity prices to continue and we also note that, over the past decade, fluctuations in mining-sector prices and demand have not led to significant swings in economic activity".
As a result, S&P expects the economy to grow by 3.3% in 2010 and 3.5% in 2011.
The agency also affirmed Australia’s A1-plus short-term rating.
S&P said in its statement:
Despite providing a large stimulus of almost 5% of GDP over 2009 and 2010, the government’s fiscal position remains stronger than most ‘AAA’ rated peers’.
We estimate the general government deficit (including federal, state, and local governments) will likely peak at a relatively modest 3.2% of GDP in 2010, reflecting rising unemployment benefits, a cyclical weakness in tax revenues, and fiscal stimulus measures targeted at education, health, and public housing and other infrastructure.
We expect the country to return to a small fiscal surplus in two-to-three years.
Moreover, we expect Australia’s general government debt burden, net of liquid assets, to peak at 12.5% of GDP in 2001–compared with 8.1% in 2009 and 16.7% for the ‘AAA’ median in 2010–before trending lower again.
We also believe that a strong political commitment to fiscal consolidation–including return to budget surpluses by about 2013–will continue regardless of which major party leads the government that emerges from the August general election.
Risks to the economy include a potential sharp drop in resources and housing prices, but these risks appear contained in our view. We expect strong commodity prices to continue and we also note that, over the past decade, fluctuations in mining-sector prices and demand have not led to significant swings in economic activity.
Another risk is Australia’s housing market, where average existing house prices have risen by about 50% over the past five years.
But while a downward correction remains a significant risk, a large and growing shortage of existing stock, combined with a limited supply of new houses, implies support for current price trends.
“We note, however, that price growth has begun to weaken, reflecting increased borrowing costs, diminished affordability, and unwinding government support for first-home buyers.
The stable outlook reflects our view that Australia’s public finances will continue to withstand adverse financial and economic shocks and that the consensus in favor of prudent budgetary policies will remain.
