There are only a handful of AAA countries left and Australia has been looking precarious for some time, but its time is up with Standards & Poor’s in 2017, Nikko Asset Management Australia has predicted.
“Last year, we heard the S&P pop their head up a few times discussing the prospect of reducing Australia’s credit rating and we think that that is likely to occur in 2017 and just after the next budget there’s a chance they’ll do that,” Nikko Asset Management’s head of Australian fixed income James Alexander said at the company’s 2017 outlook meeting.
“If that comes through, that will roll through to the AAA states so both NSW and Victoria will be downgraded if that was to occur.”
While Australia’s two most populous states remain the country’s highest performing economically, the downgrade to the AA level should boost those states that are already there, Mr Alexander said.
“NSW and Victoria will be under some pressure after the downgrade [so that’s why] we like those AA states of Queensland and WA a bit more,” he said.
While the commodity price rally will no doubt help strengthen the mining states, Mr Alexander remains sceptical that it will buy the Australian government any more time.
“I think a rise in commodity prices helps the government’s case but remember that S&P have been nervous about Australia’s AAA credit rating for more than the last 12 months, and periods where commodity prices were quite strong,” he said.
Instead, a string of broken budgetary promises from consecutive federal budgets will ultimately be enough for S&P, according to Mr Alexander.
“The issue from S&P is more about successive governments promising improvements to budget bottom lines that haven’t occurred. It’s gone on eight years now where Australia has said that they would bring their budget issue under control and after eight years it is in the same position and we still have the government today telling us everything will improve in four years,” he said.
“From my view, it’s all about the S&P losing patience. Prime Minister Turnbull and Treasurer Morrison may prove to be great salesmen that can convince S&P to give them more time, but I think it’s getting to the point where S&P has lost patience.”