S&P downgrades Australian outlook to ‘negative’

In a statement accompanying the lowered credit outlook for Australia, S&P Global Ratings said that without the implementation of “more forceful fiscal policy decisions”, material government budget deficits will “persist for several years with little improvement”.

S&P pointed directly to the outcome of the 2 July federal election in which “neither of the traditional governing parties may command a majority in either house”.
Because of uncertainty about the future composition of the federal parliament, “fiscal consolidation may be further postponed”, the ratings agency said.

S&P also called into question the government’s assumptions about the iron ore price in the 2016 federal budget.

“S&P Global Ratings projects iron ore prices to be close to US$20 per metric ton, lower than the level assumed in the government's budget in the remainder of calendar 2016 and in 2017,” it said.

In an ominous sign for Australia’s banking industry, S&P also pointed to the “surge in unproductive household borrowing for housing during the 1990s and 2000s, which was intermediated by the banking sector”.

“[Australian] household debt (including debt for small businesses) now stands at more than 180 per cent of household income,” said the statement.

Both Treasurer Scott Morrison and shadow treasurer Chris Bowen held press conferences immediately following the release of the news.

Mr Morrison noted that S&P has expressed concern "that the outcome of the election means the pace of fiscal consolation may be postponed”.

“This is why we’ve been so focused on budget repair over the past three years. We remain committed to doing it, and often to our great political peril,” Mr Morrison said.

Mr Bowen said it was a “somber day for the Australian economy”, and noted that S&P has “made it clear that the likelihood of a downgrade has increased”.

“The implications of losing the AAA rating would be significant. [It would mean] increased government borrowing costs,” Mr Bowen said.

“[There would also be an] increase in costs to the banks which would be at risk of flow-on downgrades from their AA ratings. And of course a blow to consumer confidence and investor confidence,” he said.

Perpetual head of investment strategy Matt Sherwood said the downgrade in S&P’s outlook is “the first such move by any of the major ratings agencies over the past quarter century”.

“S&P believe that the 2 July federal election result, where neither party has yet obtained a majority, indicates that the required fiscal consolidation may not be implemented by Parliament and that under this scenario our federal budget deficits would persist for longer than estimated by the federal Treasury Department,” Mr Sherwood said.

“This is not the view of Moody’s [which] recently stated that the political uncertainty will have limited credit implications for Australia, but they agreed that further reforms are required,” he said.