Moody’s Confident in Australia’s Aaa Rating, but Cites Risks

APRIL 15, 2015

Sydney. Moody’s Investors Service said on Wednesday that Australia’s top-notch Aaa sovereign rating is safe for now, but warned it could be forced to take action if the government’s fiscal deficit is not reversed over time.

Moody’s said Australia’s general government debt has risen to 30 percent of gross domestic product in 2014, from below 10 percent in 2008 due to a growing fiscal deficit.

“Although current debt levels compare favorably to Aaa-rated peers, if fiscal deterioration is not reversed through policy action, as we expect it to, it could pose sovereign credit risks,” it said in a credit analysis report.

The government is struggling to get its budget back in the black as it faces falling revenues from a slump in iron ore prices, Australia’s single biggest export earner.

Earlier this week Treasurer Joe Hockey told The Australian Financial Review he was thinking of factoring an iron ore price as low as $35 a metric ton in the May 12 budget — a far cry from the heyday in 2011 when a ton of the steel-making material could fetch nearly $200 a ton.

That would result in a further blowout in the budget deficit, which in December was forecast to be $40.4 billion this year and $31.2 billion next financial year.

On Tuesday, Standard & Poor’s placed a negative credit watch on the State of Western Australia’s AA-plus rating as low iron ore prices weakened the state’s budget.

Moody’s also cited other risks that Australia faces including high household debt, the potential for weaker growth in the non-commodity sector as well as a shock in international markets.

Yet it remained confident that Australia will be able to weather the dangers.

“Our stable outlook on Australia’s Aaa rating indicates our view that the risks from the above factors will remain contained over the outlook horizon,” it said.