The ratings agency S&P Global Ratings reaffirmed its AAA long-term sovereign credit rating and A-1+ short-term rating for Australia. S&P issued a note saying Australia should avoid a recession amid record low unemployment and elevated commodity prices, even as the economy slows this year amid higher interest rates. The RBA is expected to announce another 25 basis point increase in the official cash rate after its board meeting next Tuesday. S&P said Australia’s ratings were supported by “strong institutions, which are conducive to swift and decisive policymaking, credible monetary policy, and a floating exchange-rate regime”.
Record low unemployment and the surge in commodities associated with China’s reopening, are “providing substantial upside to the fiscal accounts”, S&P said.
The S&P noted.
“Our ratings on Australia benefit from its strong institutional settings, wealthy economy, and monetary policy flexibility. Although external indebtedness is high, external risks are balanced by a current account surplus.”
The stable outlook “reflects our expectation that the general government fiscal deficit will narrow over the next two years”, S&P added. “We expect the budget to improve because of steady revenue growth, high commodity prices, and expenditure restraint. In our view, Australia’s external accounts will likely be stronger than in the past.”
S&P’s assessment is that the general government deficit will fall to less than 2 per cent of GDP between 2023 and 2026, and that net general government debt will “remain modest” at about 30 per cent of GDP over this period.
The improvement in the fiscal balance forecast by S&P comes after the deficit blew out to a peak of 8.6 per cent of GDP following Covid-19 “shocks” in the 2021 and 2022 fiscal years.
The ratings agency said Australia’s economy “remains structurally wealthy and diversified”, with a “high GDP per capita of about $US63,000 in fiscal 2023”.
In a nod to a strong RBA S&P noted; “These strengths ensured Australia’s economy, while exposed to commodity demand cycles and vulnerable to international capital flows, remained resilient throughout Covid-19.”
S&P Warns Against Pump Priming the Australian Economy
The S&P reminded their stance on overzealous pump priming, they issued the same warning a few years ago.
“We could lower our ratings if we believe the general government deficit is unlikely to narrow over the next two years, causing debt and servicing costs to rise,” S&P said. “This could occur if the economy underperforms our expectations, the government increases expenditures, or commodity prices are much weaker than we expect.”
A clear warning to the new Albanese government against significantly pump-priming the economy with handouts or tax cuts in the May budget. Any such easing of fiscal policy in response to windfall gains from stronger-than-expected commodity prices would add to the pandemic-era debt pile as rate hikes start to bite.
A note from November 2019 warning on pump priming:
Commodity Price Affect
S&P noted a sharp fall in commodity prices could also reverse recent gains in Australia’s external accounts to put downward pressure on its credit ratings. Coal, LNG and Iron Ore are Australia’s biggest export earners.
Iron ore prices have been on a tear, hitting hit seven-month highs Monday from an expected uptick in demand from China following its post-Covid reopening as the the biggest consumer of most commodities.
Singapore iron ore futures rose 1.5 per cent to $US128.20 a tonne as Chinese markets resumed trading following Lunar New Year celebrations last week. It was the highest price for Singapore futures since the start of June. Iron ore prices have risen 70 per cent since the beginning of November.
In the October minibudget, Treasury assumed iron ore would fall to $US55 a tonne and assumed coking coal would fall to $US130 by the end of the March quarter. It also assumed that thermal coal would fall to $US60 a tonne.
Coal prices have also held up much better than forecast. Coking coal was at $US339.30 and thermal coal was at $US266.25 a tonne at the end of last week.
High Household Debt
S&P said Australia’s high level of household debt means consumers are “particularly sensitive to rising interest rates” and below-trend consumption is likely as mortgage payments rise.
On the positive side they said the low unemployment rate of about 3.5 per cent meant “higher costs and mortgage payments can be absorbed by households, in our view”.
“We expect the slowing economy to add roughly 1 percentage point to unemployment over the next two years, meaning unemployment will still be low in a historical context.”
A strong rebound in migration is expected to ease labour shortages and boost demand.
S&P expects population growth of 1.2-1.6 per cent per year until 2026 as the government increases its migration intake after net migration turned negative for the first time since 1946.
Australia is one of just 11 sovereigns that S&P Global Ratings rates AAA. The Australian government has been under pressure from economists, Labor and the Reserve Bank to increase fiscal stimulus amid soft economic growth.
Source: S&P, AFR
On a Sunburnt Country…. From The TradersCommunity Research Desk