S&P places Australia on negative watch

11 July 2016
Standard and Poor (S&P) has placed Australia on negative watch, flagging the possible loss of AAA credit rating

Whilst Australia still retains the highest possible credit rating, ratings agency S&P has sounded a warning against complacency, placing a negative watch on the rating and warning of a one in three chance of a downgrade within the next two years. This represented a revision in credit outlook from stanble to negative.

Factors that tipped the outlook into negative territory included Australia’s high level of household debt and the recent federal election result, which will create difficulty in passing legislative reform.

“The negative outlook on Australia reflects our view that prospects for improvements in budgetary performance have weakened following the recent election outcome”

“Given the outcome of the July 2, 2016, double-dissolution election, in which neither of the traditional governing parties may command a majority in either house, we believe fiscal consolidation may be further postponed.”S&P

Responding to the ratings agency announcement, federal treasurer, Scott Morrison, said that S&Ps outlook highlighted the need for the Government to live within its means and continue with the task of reducing debt and deficit and growing the economy.

“The Coalition took to the election a firm plan to improve the Budget and reduce the deficit over the next four years and over the past three years have acted to repair the budget,” he said.

“We remain committed to budget repair and will work with the Parliament to maintain our triple-A rating by continuing to live within in our means and making sure that every new dollar of spending is paid for with savings elsewhere in the Budget.”

In the face of a sluggish economy a ratings downgrade could seriously impede the government’s efforts to boost economic growth, with higher borrowing costs a real possibility.

Shadow Treasurer, Chris Bowen, warned that the latest credit rating update from S&P Global Rating was sombre reading for the nation.

“This is a government that has failed to make any dent into the deficit over three years and has simply failed to put forward a fair plan that is palatable to the Parliament,” he said.

“Labor is calling on the Government, consistent with the advice of rating agencies, CEDA, the Grattan Institute, etc, to implement reforms to negative gearing and the capital gains tax discount.”

It was not just politicians weighing in to the commentary, with the Business Council of Australia (BCA) calling on all political representatives to work constructively to deliver a well-functioning parliament focused on Budget repair.

“While seats in our federal parliament may be changing, the fundamentals of the economy have not,” said BCA chief executive Jennifer Westacott.

“The two priorities still facing Australia’s leaders are: growing the economy faster and getting our Budget under control. Only by doing both together will we protect our standard of living and create more and better jobs for Australians.”

S&P’s decision to place Australia on a negative outlook as a result of the election outcome means that there is a one-in-three chance that S&P could lower the rating within the next two years.

Over the next six to 12 months S&P will continue to monitor the success or otherwise of the Government’s ability to pass revenue and expenditure measures through both houses of Parliament.

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