Daily Commentary BY THE CURVE TEAM –

S&P Threat Looms

12th of March, 2021

Government spending during the economic recovery could put Australia’s AAA credit rating in jeopardy, which has ramifications for ADI ratings.

Naturally, fiscal spending has increased during the pandemic to support the economy. Almost all developed countries are in the same position.

As a result, the deficit has blown out to an estimated 14% of GDP. Currently, such a deficit is justified, but should deficits remain above 3% in two years’ time then S&P would likely lower the sovereign rating.

Much of this will depend on the speed of the economic recovery in Australia. Should the economy recover rapidly, then fiscal stimulus should ease faster. This is based on the governments indications that they will reduce spending as the economy recovers.

A downgrade to Australia’s sovereign rating could have knock on effects for the ratings of ADIs. NAB was recently put on a negative outlook by S&P off the back of the outlook for the sovereign.

Other ADIs may fall into the same scenario, where their credit rating falls if the sovereign rating falls. This would be bedlam for investors wishing to remain compliant with their policy, especially if the major banks ratings fall.

Overseas, US president Biden has passed the $1.9 trillion stimulus package. This has the potential to stoke consumer spending and as a repercussion inflation may spike.

The ECB also announced they would bring forward their QE purchases. This follows the RBA earlier in the week making clear that they were defiant in their view that the cash rate would remain at 0.10% until at least 2024, despite recent market pricing that indicated otherwise.

Josh Stewart

Associate - Money Markets