Australia Sovereign Outlook Raised by S&P as Recovery Quickens

Australia’s AAA credit rating outlook has been raised to neutral from negative, reflecting the government’s rapid and decisive fiscal and health response to Covid-19, S&P Global Ratings said.

The efforts to “contain the pandemic and limit long-term economic scarring has seen the economy recover quicker and stronger than we previously expected,” S&P said in a statement Monday. “We are more confident that the general government’s fiscal deficits will narrow toward 3% of gross domestic product during the next two to three years after a 10% deficit in fiscal 2021.”

The revision comes about a year after the ratings agency downgraded the outlook in the wake of the pandemic. It maintained the sovereign rating at AAA.

Australia unleashed a massive fiscal-monetary injection to support the economy through lockdowns and the authorities’ ability to contain Covid to limited flare-ups has seen a rapid rebound in household and businesses sentiment. That’s encouraged spending and hiring, allowing the economy to recoup its pandemic losses in the first quarter of this year.

“The stable outlook reflects our expectations that the general government fiscal deficits will narrow in line with our forecasts,” S&P said. “We expect the budget to be supported by steady revenue growth, aided by robust commodity prices and expenditure restraint. We believe Australia’s external accounts are likely to remain stronger than in the past.”

The government unleashed additional spending in last month’s budget as it tries to drive the economy to maximum employment and return inflation to the Reserve Bank’s target. The fiscal push has been aided by iron ore, Australia’s largest export, trading near record highs as producers struggled to meet demand from Chinese steel mills.

In terms of downside risks, S&P said it could lower the rating if the deficit looked unlikely to narrow over the next two to three years.

“This could occur if the economic recovery slows, there are prolonged lockdowns, the government implements substantial additional fiscal stimuli because of large unforeseen outbreaks, or commodity prices fall much faster and further than we expect,” it said. “A sharp fall in commodity prices could reverse recent gains in Australia’s external accounts.”

S&P lowered Australia’s credit rating to negative in April last year as the government prepared to implement stimulus programs to support the economy.

©2021 Bloomberg L.P.

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