MCO Moodys Corp

By James Glynn 

SYDNEY -- Australia could lose its rare triple-A credit rating after a tight general election raised questions about the next government's ability to curb spending and bring down debt.

The election remains too close to call, but the prospect of a lengthy period of political instability -- such as a hung parliament in the 150-seat House of Representatives, where governments are formed -- complicates Australia's challenge in revving up an economy hit by the end of a decadelong mining boom.

On Monday, Standard & Poor's Global Ratings said "parliamentary gridlock" could trigger a downgrade if it means Australia's finances don't improve. Moody's Investors Service said its assessment could change if the new parliament led to an undesirable shift in policy.

It highlights how politics is increasingly influencing the thinking of ratings companies as signs grow that the global economic recovery is faltering. S&P stripped the U.K. of its pristine triple-A rating within days of the country's vote to leave the European Union, citing concerns about constitutional and economic integrity.

Australia has notched up 24 years without a recession -- the longest current streak in the developed world -- and its problems are such that other economies might wish for. In 2015 its economy grew by 3%, with gross government debt estimated at 37%. By contrast, the eurozone reported growth of 1.5% and Japan of 0.4%, and the International Monetary Fund put their debt ratios at 93% and 248%, respectively.

Australia's debt load, however, is growing at a pace that is among the fastest in the world. After rolling out one of the biggest fiscal expansions of any major economy in response to the global financial crisis, the country has failed to bring the budget back under control as commodity prices have fallen.

Neither the Liberal-National coalition, led by Prime Minister Malcolm Turnbull, nor the center-left Labor Party, led by Bill Shorten, made budget repair a central campaign issue -- and ratings companies fear neither man will be able to push through tough economic policies to slow the rise in debt if he has to horse-trade to cobble together a coalition government.

"Irrespective of the political composition of any new government, we could lower the rating if parliamentary gridlock on the budget continues and Australia's budgetary performance doesn't improve broadly as we expected a year ago," said S&P, which is expected to publish its next official review of the sovereign rating this month.

Moody's said the credit implications of political uncertainty would be limited -- if it is short-lived. "The electoral outcome would affect the sovereign credit profile only if it changed broad policy priorities and the effectiveness of their implementation," said Marie Diron, a senior vice president at the ratings company.

Investors rely on ratings from S&P, Moody's and Fitch Ratings when deciding whether to buy bonds. Australia is one of a handful of AAA sovereigns left, and losing the rating would make it harder and costlier to attract foreign capital.

To be sure, even lower-rated sovereign debt remains attractive to investors who consider it a safer bet than global equities or currencies. Australian government 10-year bond yields hit record lows last month -- reflecting global trends, but also benign local inflation.

Paul Dales, chief economist for Australia and New Zealand at Capital Economics, said a downgrade could be imminent. "A minority government is unlikely to pass the fiscal measures required to satisfy the ratings agencies. They may even pull the plug this week," he said.

Attempts at budget repair by various governments over recent years have been repeatedly thwarted by a hostile Senate, the upper house of Parliament. Early counting indicates the next prime minister will have to deal with an even more disparate band of Senators, ranging from anti-immigrationists to free-trade skeptics.

One of the first tasks of the new parliament will be to debate the last budget, announced in May.

Su-Lin Ong, senior economist at RBC Capital Markets, based in Sydney, said the prospect of an ineffectual parliament will have widespread consequences. "The likely outcome bodes poorly for confidence, growth, and reform and we believe will weaken further the nation's AAA sovereign rating while keeping pressure on the Reserve Bank of Australia to do the heavy lifting."

The RBA, which will decide on interest rates Tuesday at its regular monthly board meeting, has called for reform to boost the economy as it transitions away from mining-reliant to more services-based.

In an interview in May, RBA board member John Edwards said the government's plans to restore the budget to surplus were implausible, and warned that the ratings companies were moving closer to action.

"I don't think we can disregard the possibility that the ratings agencies will lose patience with a fiscal trajectory which is simply not plausible," Mr. Edwards said. "There is always a risk we are going to be kicked out of the (AAA) club."

Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

July 04, 2016 07:39 ET (11:39 GMT)

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