Australia: Focus on AAA rating - Westpac

David Goodman, Research Analyst at Westpac, suggests that with FOMC and their “dots” behind us, the Australian market will focus on Monday’s MYEFO and the speculation that this could see S&P downgrade the Commonwealth's AAA rating.

Key Quotes

“Recall that S&P placed the sovereign outlook on negative on July 6 (before the federal election outcome was known) as a result of growing fiscal vulnerabilities.”

“Australia's financial outcomes have been deteriorating in absolute and relative terms, and its external indebtedness is unique however a key part of S&P’s outlook was qualitative and regarded the “government's ability to pass revenue and expenditure measures through both houses of parliament”.”

“A downgrade after MYEFO is not our expectation - we think the downgrade will occur following next year’s Budget - however the odds are high enough that we would not be surprised. Certainly media speculation is rife.”

“While we would not expect the Commonwealth's funding costs to rise too much under that eventuality, it would certainly not be a positive from either a market or political perspective. Perhaps the bigger impact will be on banks and semis where a mechanistic downgrade will be assured.”