Australia Must Mend Budget as Expected to Keep Rating, S&P Says

Australia’s credit rating could be cut if political wrangling or an external shock such as a further decline in commodity prices mean the budget fails to improve as expected, Standard & Poor’s said Friday.

While the credit assessor affirmed the country’s AAA rating with a stable outlook, it said that view is premised on the country maintaining “conservative budgetary policies” that will narrow the fiscal deficit.

“We could lower the ratings if Australia’s budgetary performance does not improve broadly as we currently expect,” S&P said. “Continued parliamentary gridlock on the budget could trigger this scenario, as could an external shock. The latter could come from further deterioration in Australia’s terms of trade, for example, or from a sharp increase in the banking sector’s cost of external funding.”

The Australian government, which has recorded budget shortfalls for the past seven years, is targeting a return to surplus by 2020, Treasurer Joe Hockey said in May. His task may be complicated by parliamentary opposition to some planned budget measures and declining revenues from key export resources such as iron ore, which have seen prices slump due to oversupply and a slowdown in the Chinese economy.

Although S&P sees Australia’s public finances as “strong” with low debt and deficits, it said that public-sector savings are a “necessary countervailing force” for the high level of external indebtedness on the part of private borrowers, which the ratings firm views as the nation’s “key credit weakness.”

Prudent Management

S&P also said that it believes there is a consensus in Australia for “prudent management of public finances” and that current disagreements among lawmakers over budget measures reflect differences over how this should be achieved.

Australia’s economy is struggling to find alternative drivers of growth as the recent boom in mining investment tapers off. S&P reckons it grew by just 2.4 percent in the 12 months through June.

It has also been hurt by the slowdown in China, its biggest trading partner. Year-on-year growth in the world’s second-largest economy slowed to 7 percent in the second quarter of 2015, while a private gauge of manufacturing released Friday fell to its weakest level in 15 months.

“Australia’s growth prospects, prosperity, and credit quality remain exposed to its growing dependence on trade with China,” S&P said. “If demand for Australia’s resources were to weaken sharply, a range of disorderly dislocations in the economy could occur, including in its labor and property markets. However, so long as robust demand for its commodities continues, we believe Australia’s economic prospects over the forecast period will remain favorable.”

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