Australia yesterday avoided a feared downgrade of its coveted “AAA” credit rating after sticking to its ambition of returning the budget to surplus in 2020-2021 despite softer growth forecasts.
The country’s resources-driven economy has enjoyed more than 20 years of growth, but it is now transitioning out of an unprecedented mining investment boom and the going has been bumpy with revenues under pressure.
In a mid-year fiscal update, the government revised down the nation’s cash deficit of A$37.1 billion (US$27 billion) in 2016-2017 — as announced in the May budget — to A$36.5 million.
However, it forecast widening deficits in the next three years before a return to surplus.
“The government’s plan to restore the budget to balance remains on track,” Australian Treasurer Scott Morrison said in a statement.
Higher iron ore and coal prices would help support tax revenues, the update said, but this would be more than offset by weaker wages and non-mining company profits.
After knife-edge elections last year, Standard & Poor’s (S&P) said Australia’s rating could be lowered if Canberra did not improve its budget balances and deliver on surplus plans.
It yesterday said the update had no immediate effect on its stance, but warned the “government’s worsening forecast fiscal position ... further pressures the rating.”
S&P said it would continue to monitor the situation and was “pessimistic about the government’s ability to close existing budget deficits and return to surplus by the year ending June 30, 2021.”
Australia is one of only a handful of countries to hold the top “AAA” rating from all three major agencies, having dodged a recession during the global financial crisis.
Moody’s and Fitch also kept their ratings on hold, for now. Generally, losing the “AAA” means the nation would be forced to pay higher interest on its debt.
Capital Economics’ chief Australia economist Paul Dales said “it probably won’t be long before one or two of the ratings agencies withdraw their ‘AAA’ rating.”
“The treasurer has admitted that in the four financial years starting 2016-2017 the budget deficit will be around US$10 billion higher than forecast in May’s budget,” he said. “The chances of the budget being balanced by 2020-2021, which the rating agencies want, has become even less likely.”
The conservative government does not have a majority in the upper house Senate, meaning it has struggled to pass some spending cuts.
This has stymied efforts to rein in debt and deficits, undermining business and consumer confidence with repercussions for the economy, which contracted 0.5 percent in the September quarter.
Given the poor quarterly number, the update changed the government’s forecast for annual growth to 2 percent in 2016-2017 rather than 2.5 percent as previously predicted, before rebounding to 2.75 percent the following year.
Westpac chief economist Bill Evans called the revised forecasts “optimistic.”
“We see downside risks to these forecasts. Real GDP growth of 2 percent for 2016-2017 looks a stretch and the medium-term projections err on the optimistic side,” he said.
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