Australia's triple-A ratings safe for now

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

Australia's huge budget deficit and government debt topping $1 trillion for the first time doesn't seem to be troubling the world's major credit rating agencies, at least at this stage.

Treasurer Josh Frydenberg handed down a big-spending budget that forecasts a deficit of $213.7 billion in 2020/21, dwarfing the previous record of $85.3 billion in the last financial year.

It will see gross government debt reaching $1 trillion in 2021/22.

Australia is one of very few countries in the world to hold the top-tier triple-A rating from all three key credit rating agencies Standard & Poor's, Moody's Investors Service and Fitch Ratings.

Standard & Poor's saw no immediate threat to Australia's triple-A rating one of only 11 countries to hold its top-tier level.

"The budget confirms that the COVID-19 pandemic and stimulus packages will weigh on fiscal outcomes for years to come, with fiscal 2021 taking the brunt of the hit," S&P global ratings director Anthony Walker said.

"While debt is markedly higher than the past, servicing costs remain manageable, as the interest-rate environment will remain favourable for a number of years."

However, Australia retains a negative outlook reflecting its substantial fiscal deterioration given its rating, and risks remain tilted to the downside.

"We expect fiscal deficits to narrow from fiscal 2022 onwards, even with proposed tax reforms and new expenditure measures announced," Mr Walker said.

"Should this scenario not pan out as we expect, downward pressure on the rating may intensify."

Moody's Investors Service also noted the significant increase in Australia's debt levels to come, saying it was consistent with the nation's triple-A rating "at this point".

"Its experience with fiscal repair following past shocks and the likelihood of an extended period of low servicing costs mean that its debt remains manageable," Moody's vice president Martin Petch said in a statement.

The key risk was whether Australia would be able to meet the growth forecasts, including the forecast expansion in 2021/22.

The budget papers predict an economic growth rate of 4.75 per cent in the next financial year after a 1.5 per cent contraction in 2020/21.

Like S&P, Fitch also revised Australia's outlook to negative earlier this year to reflect the impact of the pandemic shock on the economy and public finances.

"Australia came into the coronavirus shock with fiscal space to counter the effects of the pandemic in the near term," Fitch said in a statement.

It says while the budget deficits are wider and debt is higher than previously anticipated, the medium-term debt trajectory is in line with its expectations.

"From a rating perspective, the medium-term debt trajectory is key," it says.

"Our future rating assessments will also assess the relative deterioration of Australia's fiscal position to its 'AAA' peers, whom are all seeing higher debt-to-GDP ratios."