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Australia Needs Housing Slowdown for Stability on AAA, S&P Says

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Australia’s prized AAA rating will only rest on a firm footing once there’s a “meaningful moderation” in housing and credit, S&P Global Ratings said as it maintained a negative outlook on the country’s sovereign score.

The country’s rating was affirmed by the credit assessor after the latest federal government budget projected a return to surplus by 2021, although S&P noted that revenue could disappoint and lawmakers may struggle to implement fiscal repair policies. It also highlighted risks stemming from Australia’s high level of external indebtedness. S&P has maintained a negative outlook on the country since last July when it issued a warning in the wake of a knife-edge federal election.

“The ratings could stabilize if we were to see a significant and sustained improvement in the medium-term budget outlook, leading to a return to a general government surplus,” S&P said in a statement Wednesday. “A stabilization of the ratings would also require a meaningful moderation of the credit and house price boom.”

Home prices in Sydney and Melbourne have surged in the wake of unprecedented interest-rate cuts by the Reserve Bank of Australia as the country navigates its way through the aftermath of a mining boom. Regulators have progressively tightened lending restrictions amid concerns about financial stability.

Raising Revenue

S&P’s statement follows the release last week of the government’s annual budget which outlined plans to bolster revenue. The budget has been in deficit since before the global financial crisis and projections for a return to surplus have been pushed back repeatedly. Treasurer Scott Morrison is hoping to turn around a fiscal position that’s been hurt in recent years by lower resource prices and sluggish wage growth.

“We could lower our ratings within the next two years if we were to lose confidence that the general government fiscal deficit will revert into surplus by the early 2020s,” S&P said. “A strong fiscal position is required to offset Australia’s weak external position. It is also needed to allow for a strong buffer to absorb the fiscal consequences if the ongoing boom in the credit and housing market were to abruptly end. ”

While S&P said its base case on housing and credit was a “soft landing,” it warned that a continued “unsustainable” expansion of credit could place additional pressure on the sovereign rating. “The fast and sustained growth in credit and house prices will increase risks to fiscal accounts, real economic growth, and financial stability,” it said.


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