“Underlying Resilience”: Moody’s Reaffirms Australia’s AAA Rating

By Glenn Dyer | More Articles by Glenn Dyer

Moody’s yesterday reaffirmed Australia’s AAA credit rating and maintained the stable outlook supported by what the group called the “underlying resilience of the economy” and the country’s “track record of proactive and effective policymaking.”

The maintaining of the ratings comes despite a forecast 5% fall in GDP this year for the Australian economy, according to Moody’s.

Australian economic growth fell 0.3% in the March quarter and a much larger fall is forecast for this quarter – possibly 7% to 10% according to other forecasts, with a recovery starting in the three months to September.

That 0.3% contraction compares favourably with New Zealand’s 1.6% decline, the 2.1% contraction in Canada, a 0.6% drop in Japan, a 2.0% decline in the United Kingdom, and a 1.3 slump decline in the United States.

Moody’s said, “While large, the (5.0%) fall in GDP is smaller than in other advanced economies in general, consistent with signs that more normal work and spending behaviours are gradually returning as the epidemic recedes in the country.”

In Moody’s assessment, the resilience of the Australian economy supports a return to positive growth next year, without any significant long-lasting impact on growth potential once the crisis passes.

“The economy’s shock absorption capacity is supported by its flexibility in adjusting to shifting economic environments, demonstrated during previous periods of severe economic stress including the regional shock of the 1997 Asian Financial Crises and the Global Financial Crisis.

“The economy has also shown capacity to adjust to shifting longer-term trends, and in particular the trend slowing of growth in China, which has contributed to changes in the role of the resources and services sectors in Australia.”

Moody’s noted that Australia’s “diversified economy, adaptable labour markets and flexible exchange rate” will continue to support growth while our “fiscal strength will remain broadly resilient” supported by “sound institutions with track records of responding effectively to shocks”.

Today’s report confirms Australia has maintained a AAA credit rating from all three major ratings agencies.

But while Moody’s has Australia on a stable outlook, both Fitch and Standard and Poor’s (S&P) has us on a negative outlook which indicates a possible downgrade in the next 18 months.

In its statement, Moody’s said the maintaining of the AAA stable rating reflects “Moody’s expectation that Australia’s economic and institutions and governance strengths will continue to support the sovereign’s resilience in the face of shocks including the current coronavirus pandemic.

“The economy’s wealth, diversification and effective labour market, and sound monetary, financial and fiscal institutions, with track records of proactive and effective policymaking, reduce the credit impact of shocks.”

“The depredations of the coronavirus outbreak on domestic economic activity and employment combined with a sharply worsening global economy are creating a severe and extensive credit shock across many sectors, regions and markets.

“The combined credit effects of these developments are unprecedented. For Australia, the shock manifests in reduced Chinese demand for its exports, exacerbating the effects of the US-China trade dispute; and in a significant widening in the fiscal deficits and increase in the government’s debt burden.

“However, Moody’s expects that a long-standing consensus on prudent management of public finances will continue to prevail, and as the economy recovers, the sovereign’s fiscal strength will remain broadly resilient,” Moody’s said.

“The ongoing trade dispute between China and the US exacerbates the global coronavirus shock to Australia’s economy. These factors together will have a severe contractionary effect, concentrated in the second quarter of 2020.

Moody’s expects real GDP to fall by around 5% in 2020, though a proactive fiscal and monetary stimulus response by the authorities will partly attenuate the fall in economic activity. While large, the fall in GDP is smaller than in other advanced economies in general, consistent with signs that more normal work and spending behaviours are gradually returning as the epidemic recedes in the country.”

Moody’s said “the resilience of the Australian economy supports a return to positive growth next year, without any significant long-lasting impact on growth potential once the crisis passes.

“The economy’s shock absorption capacity is supported by its flexibility in adjusting to shifting economic environments, demonstrated during previous periods of severe economic stress including the regional shock of the 1997 Asian Financial Crises and the Global Financial Crisis.

“The economy has also shown capacity to adjust to shifting longer-term trends, and in particular the trend slowing of growth in China, which has contributed to changes in the role of the resources and services sectors in Australia,” the ratings group said.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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