Powered by MOMENTUM MEDIA
Broker Daily logo

Ratings agency affirms AAA credit rating

Australia has maintained its AAA credit rating and a stable outlook despite facing the economic shocks of the coronavirus pandemic.

Moody’s Investors Service has affirmed Australia’s long-term issuer and senior unsecured AAA rating, attributing Australia’s economic strength to a range of structural factors that have supported growth potential and generally stable growth.

This comes despite the federal Treasurer Josh Frydenberg recently suggesting that Australia was now in recession after 30 consecutive years of growth.

According to Moody’s, the rating affirmation and stable outlook reflect its expectations that Australia’s strong economic institutions and governance, adaptable labour markets and a flexible exchange rate would continue to support the sovereign’s resilience even during shocks, such as the current coronavirus pandemic.

==
==

“A solid institutional framework, including transparent and effective monetary policy and financial regulation, also underpins Australia's creditworthiness, lowering the probability and lasting credit impact of economic and financial shocks,” it said.

“Political fragmentation at the Commonwealth level in recent years has occasionally impeded the legislative process. However, Australia’s policymaking institutions have consistently demonstrated high policy effectiveness.”

The Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) were singled out for demonstrating vigilance and responsiveness to changing economic and financial conditions, which have contributed to maintaining financial stability through economic and asset price cycles.

Furthermore, the economy’s wealth, diversification, as well as strong monetary, financial and fiscal institutions, with a track record of proactive and effective policymaking, will reduce the credit impact of shocks, the credit ratings agency said.

On the fiscal side, restrained government spending during periods of economic growth and commodity prices, and prudent management of public finances have helped the government rebuild its financial buffers in the past.

“As a result, Australia entered the coronavirus pandemic with a relatively moderate debt burden, providing scope for the government to implement very large fiscal policy support packages,” Moody’s said.

In light of the recent fall in economic activity and easing of fiscal policy, Moody’s has forecast Australia’s general government debt burden to rise above 50 per cent of GDP in the fiscal year ending June 2021, from 41.8 per cent in fiscal 2019, with further “modest” increases in the following years.

The shock of COVID-19 in Australia has manifested in reduced Chinese demand for its exports, worsening the effects of the US-China trade dispute, and a considerable widening in fiscal deficits and increase in the government’s debt burden, Moody’s said.

“However, Moody’s expects that a longstanding consensus on prudent management of public finances will continue to prevail, and as the economy recovers, the sovereign’s fiscal strength will remain broadly resilient,” it said.

However, Moody’s still expects real GDP to fall by around 5 per cent in 2020, but noted that a proactive fiscal and monetary stimulus response by the government and institutions will partly cushion the fall in economic activity.

“For Australia, the main channels of economic exposure to the shock emanating from the coronavirus outbreak are the impact of the lockdown policy response to rising infections earlier this year on consumer spending and business investment and a sharp slowdown in exports of goods and services, reflecting a slump in global trade,” Moody’s said.

“The ongoing trade dispute between China and the US exacerbates the global coronavirus shock to Australia’s economy. These factors together will have a severe contractionary effect, concentrated in the second quarter of 2020.”

While the expected fall in GDP is significant, Moody’s pointed out that the fall is smaller than in other advanced economies in general, which may be a sign that more normal work and spending behaviours are gradually returning as the number of coronavirus cases decrease in Australia.

Looking ahead

The resilience of the economy could mean a return to positive growth next year, without any significant long-term impediments on growth potential once the pandemic has passed, according to Moody’s.

“The economy has also shown capacity to adjust to shifting longer-term trends, and in particular the trend slowing of growth in China, which has contributed to changes in the role of the resources and services sectors in Australia,” it said.

Commenting on Moody’s issuing of the AAA credit rating, Mr Frydenberg said it was a reminder of the importance of maintaining medium-term fiscal sustainability.

He added that while “we are not through this crisis yet”, there have been encouraging signs in the economy as restrictions have started to ease.

“Consumer confidence increased for nine consecutive weeks after the announcement of JobKeeper recovering around 93 per cent of the fall from mid-March,” he said.

“Business confidence rose in May and has recovered around 70 per cent of its record fall in March.”

[Related: Job losses soar beyond expectations]

More on Economy
21 November 2024
After witnessing some positive trends in the offset of COVID-19, business failures across the country have picked up ...
21 November 2024
With GDP growth at just 0.2 per cent as of the June quarter of 2024, small and medium-sized enterprises (SMEs) are ...
20 November 2024
The RBA minutes for the November meeting revealed that members recognised the importance of flexibility in monetary ...