Can the Australian economy maintain its AAA rating?
With regard to the Australian AAA sovereign rating, the risk of a negative outlook has increased.
We will be watching data releases closely in the months ahead – particularly consumption, and employment data – to gauge if the traction we have witnessed in the non-mining sector of the economy due to interest rate cuts is sustained by the fiscal measures announced in the budget.
If this is the case, we would expect market interest rates to push higher as the market prices expectations that the Reserve Bank of Australia (RBA) has delivered its last interest rate cut in this cycle. Whilst we still see this as a premature judgement, given the structural headwinds from the weak mining sector and a high Australian dollar, we do think that the hurdle to cut again in 2015 is high even with a dovish RBA.
With regard to the Australian AAA sovereign rating, the risk of a negative outlook has increased. Nonetheless, we believe that as long as the change in general government debt as a percentage of Gross Domestic Product (GDP) is between 0-3.0%, net government debt can hold below 30% of GDP, holding off a sovereign credit downgrade.
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