Australia’s AAA rating must “demonstrate ongoing restraint”

Edited by Nelly T.

According to the NAB’s global head of research, Peter Jolly the Commonwealth government’s debt load is pushing against the rating agencies AAA boundary.

In frank terms treasurer Scott Morrison will need to tread carefully for a time to slow the growth of Australian government debt while balancing the looming election and the need for ongoing monetary restraint.

“A quick look at Australia’s recent fiscal trajectory makes it clear why restraint will be required – at least if keeping the AAA rating is a desired policy outcome,” Jolly said.

NAB’s global head of research said Australia’s gross debts at a Commonwealth, state and local level remain “fairly modest” when looked at from a global perspective. However he also mentioned that such comparisons tend to mask the deterioration in the nation’s debt position.

“The latest ratio of 15% of GPD to June 2015 is above the long run average and is forecast to rise further and peak at 18.5% of GPD by June 2018,” he wrote.

Jolly continued on to explain a number of factors went into assessing a nations sovereign credit rating including “factors like the economy (a strength for Australia), institutional frameworks (a strength), the external liabilities of all of Australia (a weakness), monetary flexibility (a strength), as well as the government’s fiscal position (for now a strength).”

It is clear that from the deterioration in the government’s position and recent agency comments “the Commonwealth is starting to push against the AAA boundary,” said Jolly.

Australia’s AAA rating is important as it offers Australia membership of a small and elite club of nations who are able to reliably attract capital, and attract that capital and investment at reduced margins over the predominant level of interest rates in the economy than lower rated countries.

As well as being crucially important for Australia’s banks who are the intermediaries funding economic activity and as a nation that has constantly depended on foreigners to help fund economic activity Australia’s AAA rating is a vital part of reducing overall borrowing costs in the economy.

“The good news is that for now the ball remains in the court of the government,” said Jolly. Although he warns the treasurer needs to keep the rating agencies comfortable with Australia’s AAA rating. As a result, the “May budget will need o demonstrate ongoing restraint.”

This means fiscal policy will continue to be a handbrake on growth which in itself might ultimately cause a problem for the economy and Australia’s AAA rating.