(Bloomberg) -- S&P Global Ratings lowered the outlook on Australia's AAA credit rating to negative from stable after the outcome of Saturday's federal election potentially dented the government's prospects for reining in a budget deficit.
“The negative outlook on Australia reflects our view that without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement,” S&P said in a statement Thursday.
There is a “one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s,” the ratings agency said.
Australia's dollar weakened as much as 0.7 percent and was 0.2 percent lower at 75.06 U.S. cents as of 12:37 p.m. in Sydney from Wednesday.
“The fact the rating wasn't actually downgraded was positive,” said Jason Wong, a currency strategist in Wellington at Bank of New Zealand Ltd. The Australian dollar “has “reacted negatively, but I wouldn't expect the move to be sustained. By global standards, Australia is a very strong credit.”
S&P said earlier this week that it could lower Australia's credit score if parliamentary gridlock on the budget continues. The federal election failed to deliver either Prime Minister Malcolm Turnbull's Liberal-National coalition or the main opposition Labor party a strong mandate, potentially weakening the eventual winner's ability to push through fiscal savings measures.
Given the outcome of the election “in which neither of the traditional governing parties may command a majority in either house, we believe fiscal consolidation may be further postponed,” S&P said.
S&P provides “important context for the incoming parliament about the reality of the fiscal environment and the global economic environment,” Treasurer Scott Morrison told reporters in a televised news conference. The government needs “to live within our means when it comes to the fiscal settings of the Commonwealth.”
“Fiscal consolidation cannot be postponed or slowed,” Morrison said.
Seat Tally
The coalition has won 73 seats in the 150-member lower house to Labor's 66, according to a projection by the Australian Broadcasting Corp. with 82 percent of the vote counted. Independents and minor parties won five, and six districts were still in doubt. Turnbull needs 76 seats to form a majority government.
S&P's decision to shift its outlook comes as the nation faces a decline in tax revenues amid a drop off in commodity prices and a fall in mining investment. While the government has sought to chart a path back to surplus, budget deficit projections have been repeatedly revised higher and measures to curtail the shortfall have also been stymied in parliament.
The government in May forecast Australia's deficit at A$37.1 billion ($27.8 billion) in the year through June 2017, wider than predicted six months earlier. This deterioration from earlier forecasts has been a constant fiscal feature in Australia since deficit spending began in 2008-09 to combat the global financial crisis and keep the economy out of recession.
“We do not believe S&P's news is a trigger for a big fall in the Aussie,” said Joseph Capurso, a senior currency strategist in Sydney at Commonwealth Bank of Australia. “After all, the rating has not been cut, merely the risk of a cut to the rating has increased. Even if the rating is cut by say one notch to AA+, Australia will merely be joining most other developed economies' ratings.”
To contact the reporters on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net, Benjamin Purvis in Sydney at bpurvis@bloomberg.net. To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Chris Bourke
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