The Australian government is currently rated with the highest credit rating, AAA by Standard and Poor’s, Moody’s and equivalent by Fitch.
There have been commentary that the uncertainty from the recent Australia parliamentary election could put Australia’s credit rating at risk. However we do not consider the loss of top tier rating would pose any significant risk or long lasting impact on the economy. Conditional that the government will not sacrifice the economy to achieve a budget surplus.
The government credibility for fiscal responsibility in the eyes of market is strong on the Federal and State levels. Whilst the uncertainty post election and the lack of clear mandate for either party will lead to volatility in the Australian dollar against all major pairs such as the AUDUSD, AUDEUR, AUDJPY. We are reviewing our Australian dollar forecast in the meantime.
Credit means to an end
We have always been wary of the tail wagging the dog where one sacrifice the economy just to keep a credit rating. The collapse in popular support for the establishment parties in the UK could be seen primarily due to the Austerity measures instituted by the conservative government. The major political and economic consequence is Brexit and subsequent collapse of the British pound.
If Australia credit rating is downgraded, the worst case is a round of austerity which will hit economic growth.
Australia AA Rating?
We think the key impact would be on economic sentiment rather than any real financial impact. The record low cash rate set by the RBA means that market rate and spreads will be anchored at current historical low levels.
There is negligible difference in cost of borrowing between AAA and AA especially under the current global low interest rate environment. Australia 10 year yield is near 2% comparable to similar US treasury rates at low 1%.
Any credit downgrade by the rating agencies should be addressed by a credible growth policy and limit any wide extend damage to the private sector.