(Bloomberg) -- Australia’s AAA credit rating -- one of only 11 in the world -- would come under increased “downward pressure” if the government opted to deploy fiscal stimulus that changed the trajectory of the budget, S&P Global Ratings said.
The agency, in a report Wednesday, said the top ranking is reliant on “strong fiscal outcomes,” potentially helping explain the Australian government’s determination to return its books to the black. Its drive to balance the budget comes against the backdrop of a slowing economy and a central bank with little conventional interest-rate ammunition remaining.
Australia is on target to return its budget to surplus after a decade in deficit, one of the reasons “why we revised our outlook on the sovereign’s ‘AAA’ rating to stable from negative” in September 2018, S&P said. Since then, the Reserve Bank has cut interest rates three times to a record-low 0.75%, and estimates it has two more cuts available before reaching the effective lower bound on policy.
“As the official cash rate in Australia moves toward zero there have been growing calls for the government to increase fiscal stimulus,” S&P credit analyst Anthony Walker said. “If this fiscal stimulus involves substantial spending initiatives and changes the trajectory of the budget, then doing so could increase downward pressure on our rating and outlook for Australia.”
Treasurer Josh Frydenberg has resisted suggestions from RBA Governor Philip Lowe to use low borrowing costs to increase spending on infrastructure and boost growth and hiring in an economy expanding at the slowest pace in a decade. The treasurer is adamant that tax rebates and existing infrastructure programs are sufficient support.
The economic significance of the AAA rating is limited, with S&P’s announcement in 2016 that it was cutting Australia’s outlook to negative from stable eliciting a yawn from currency, bond and equity markets. But for lawmakers, it’s a symbol of competence and losing the top ranking is viewed as a potentially devastating blow to a government’s economic credibility.
Walker said that while spending initiatives would probably support the economy, they’re also likely to weaken Australia’s fiscal flexibility to respond to future unforeseen economic shocks.
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