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S&P lowers Australia's ratings outlook to negative on concerns over budget deficits

S&PGlobal Ratings on July 7 revised its outlook on Australia's ratings to negativefrom stable, citing concerns that the government's budget deficits may see littleimprovement for several years unless more forceful fiscal policies are implemented.

"Weare revising the rating outlook on Australia to negative from stable because webelieve that without remedial action the government's fiscal stance may no longerbe compatible with the country's high level of external indebtedness," therating agency said.

Alongsidevulnerability to weak commodity export demand, S&P believes that high indebtednesscould endanger the country's overall economic strength and, hence, its AAA rating.

The ratingagency affirmed Australia's AAA long-term and A-1+ short-term sovereign credit ratingsfor now but said that there is a one-in-three chance that the rating will be loweredin the next two years if parliament fails to implement sufficient measures to significantlynarrow the budget deficit to a balanced position by the early 2020s.

The ratingagency also said that chances for improving budgetary performance are lower followingthe recent election outcome, even though fiscal deficits are set to improve overthe medium term.

"S&PGlobal Ratings projects iron ore prices to be close to US$20 per metric [tonne]lower than the level assumed in the government's budget in the remainder of calendar2016 and in 2017, although the impact on the mining sector's profits may be partlyoffset by a weaker currency.

"Asidefrom commodity prices, we also consider that there remains downside revenue riskif Australia's inflation and wage growth is weak for longer than the budget anticipates.In addition, there remain government savings decisions, equivalent to 0.1%-0.2%of GDP each year, to which the parliament so far has not assented, and may continueto block post-election," the rating agency noted.

In itsMarch quarterly report, Australia's Department of Industry, Innovation and Sciencehad forecastiron ore to average US$45.00 per tonne this year and US$55.00 per tonne in 2017.

SNL Metals & Mining is anoffering of S&P Global Market Intelligence. S&P Global Ratings and S&PGlobal Market Intelligence are owned by S&P Global Inc.