Given the ruminations in the press today that the Federal government is preparing to jettison its commitment to a surplus, I spent some time this morning chatting with Kyran Curry, soveraign analyst for Australia at S&P.
I asked, in the view of S&P, whether the context of the global slowdown (global growth of 3%, China growing at 7.5%) was sufficient to justifiy missing the surplus without jeoarding the AAA rating? Mr Curry replied:
Yes, we believe that Australia’s relatively strong balance sheet gives it scope to delay retuning its balance to surplus for when economic conditions allow, without threatening the ‘AAA’ rating.
I then mentioned that S&P had previouisly stated that all things being equal Australia must reach a public surplus “across the cycle” to support its AAA rating and asked if they consider the failure to reach to surplus at this stage a failure “across the cycle”. Mr Curry replied:
No. We would be more concerned if the government still failed to deliver a surplus when the economy was growing back toward trend.
Finally, I asked if the Australian government continued to run small deficits ($0-5 billion per annum across the cycle) would that be sufficient to support the AAA rating? Mr Curry replied:
The AAA ratings and the stable outlook reflect our view that Australia’s public finances will continue to withstand potential adverse financial and economic shocks. We also believe that Australia’s political consensus in favour of prudent budgetary policies will lead to a stabilisation in its fiscal balances (ie balances or small surpluses over the cycle) as conditions allow. This broadly assumes that fiscal consolidation will continue, and that the general government debt burden will remain low and on a declining trajectory.
We could lower the ratings if Australia’s external imbalances (ie particularly the large external debt that is intermediated through its banks) were to grow more than we currently expect, either because the exchange rate no longer adjusts to terms of trade movements, the terms of trade deteriorates quickly and markedly, or the banking sector’s cost of external funding increases sharply.
This type of external shock could lead to a protracted deterioration in the fiscal balance and the public debt burden.
To specifically address the pretext of your questions, a short-term delay in returning Australia’s fiscal balance to surplus would be unlikely to have immediate ratings implications – but it could be a different outcome if there was an extended delay that lead to a protracted deterioration in the public debt burden.
I would describe that as ‘don’t push your luck’.
