The rating agency maintains its negative outlook on Australia’s triple-A rating, while both Moody’s Investors Service (Moody’s) and Fitch Ratings (Fitch) are retaining stable triple-A ratings on the Australian sovereign.

However, in a rating update published following the MYEFO, S&P emphasises that there is no immediate” impact on the rating and that it is still “pessimistic about the government’s ability to close existing budget deficits and return a balanced budget” by the new forecast point of the 2020/21 fiscal year.

“The government’s worsening forecast fiscal position, as outlined in its latest budget projections… further pressures the rating,” S&P confirms. “Over the coming months, we will continue to monitor the government’s willingness and ability to enact new budget savings or revenue measures to reduce fiscal deficits materially over the next few years.”

A research report published by Deutsche Bank following the MYEFO points out that the update contains a forecast “slightly weaker fiscal position” (see table on this page) based on “lower than expected revenues partly offset by lower expenses”. The report notes that the A$2.5 billion (US$1.9 billion) improvement in forecast budget decision created by policy outcome is “a very small amount given the size of the federal budget”.

SOURCE: AUSTRALIAN COMMONWEALTH GOVERNMENT TREASURY, DEUTSCHE BANK 19 DECEMBER 2016

The consensus analyst opinion in the run-up to the MYEFO was that an S&P downgrade of the Australian sovereign would not be a surprise. However, S&P was already an outlier among rating agencies when it comes to Australia, as both Moody’s and Fitch retain stable triple-A views. These two ratings were confirmed by the agencies immediately following the MYEFO. Moody’s and Fitch share some of S&P’s concerns, but believe Australia has enough flexibility to justify continued stable triple-A status.

Both imply a watching brief in their post-MYEFO updates. Moody’s says: “The government’s decision to maintain the objective of a balanced budget by 2020/21 denotes continued commitment to fiscal consolidation. However, meeting the fiscal targets will be difficult in an environment of weaker nominal GDP growth.”

Moody’s takes a positive view of revisions to the government forecasting methodology – specifically lower GDP growth expectations and the removal of an assumption that commodity prices will remain at MYEFO levels in favour of an expectation of lower prices.

But structural issues remain for Australia, so far as Moody’s is concerned. Its post-MYEFO report continues: “Although progress has been made since the budget in implementing fiscal consolidation measures, this has been achieved mainly through appropriations and regulations. Legislating fiscal consolidation measures remains challenging. As a result, we expect that the budget deficits will be somewhat wider for longer than currently projected.”

Even so, the latest Moody’s forecast is for Australian gross general government debt to rise to 42 per cent of GDP in the next couple of years – a level it says is “broadly in line with the median of Aaa-rated sovereigns”.

Fitch says its projection of Australian public debt direction delivers a trajectory that is still consistent with a stable triple-A, too – and adds that it may need exogenous events to derail this resilience.

The rating agency says: “Fitch’s assessment is sensitive to a material deterioration to the public debt profile, for example through a change to the economic or policy outlook or a change in our view of the likelihood and magnitude of potential shocks.”

S&P initially changed its outlook on the Australian sovereign rating to negative on 7 July last year. Speculation about the Australian triple-A had grown as successive Commonwealth budgets have pushed a prospective return to surplus further over the out-year horizon.

In its July rating update, S&P noted that the Australian government now projects return to surplus for the 2020/21 fiscal year. “[This is] eight years later than the previous government’s earlier projection of fiscal year 2012/13, which it made in 2009; and, if achieved, it would come more than 10 years after the global recession initially pushed the central government budget into deficit,” the rating agency said.

S&P acknowledged that fiscal deterioration, while ongoing, has decelerated. But it added: “At the central government level, budget deficits have been little changed over the three years to fiscal year 2016.”

S&P continued: “While we expect that fiscal deficits will improve over the medium term, we are more pessimistic about the central government’s revenue outlook than the government was in its latest budget projections.”

Political risk also factors into the outlook decision, as S&P noted: “There remain government savings decisions, equivalent to 0.1-0.2 per cent of GDP each year, to which the parliament so far has not assented, and may continue to block post-election.”