Goldman Sachs sees Australia's AAA rating at risk of downgrade

[SYDNEY] Australia risks losing its top credit rating from Standard & Poor's for the first time in more than two decades, Goldman Sachs Group Inc said.

Plunging commodity prices, weaker economic growth and government difficulties in passing legislation are expected to spur a further deterioration of the nation's finances that could lead S&P to place its AAA sovereign rating on negative outlook within coming months, according to analysts Tim Toohey and Andrew Boak.

Australia's economy is suffering as it attempts to navigate the end of a mining investment boom, a slowdown in China and a sharp drop in the price of key exports such as iron ore that is reducing federal government revenue. Goldman Sachs estimates Treasurer Joe Hockey will reveal a further A$55 billion (S$58.1 billion) hole in the government finances when he delivers the budget on May 12.

"The recent sharp decline in Australia's terms of trade and domestic political impasse have combined to further aggravate long present external vulnerabilities and weigh further on Australia's public finances," Mr Toohey and Boak wrote in a note to clients. "A continuation of the recent pattern of fiscal slippage has Australia on a path to potentially experience its first ratings downgrade since 1989." S&P has rated Australia AAA since 2003, when it increased its score by one level from AA+. Its ranking fell as low as AA when it was last cut in the 1980s and it remained at the third- highest investment-grade score for almost 10 years it was boosted to AA+.

Melbourne-based S&P spokesman Richard Noonan said by phone Wednesday that the company won't be commenting Australia until after the budget is delivered.

Elite Group Australia is one of just 12 nations to carry a AAA score at S&P, and one of just nine to also hold the same ranking at Moody's Investors Service and Fitch Ratings.

Mr Hockey told the Australian Broadcasting Corp on Tuesday that the country's credit score is safe so long as the government has a credible budget trajectory.

A downgrade could weigh on the nation's currency, which Goldman sees falling to 67 US cents over the next 12 months from 79.94 cents as of 12 pm on Wednesday in Sydney.

A decision by S&P to cut Australia's sovereign rating would probably also lead to a downgrade of the nation's banks, Goldman said. The four largest lenders are currently at AA-, three levels below the federal government.

Downgrades also generally exert upward pressure on borrowing costs, the analysts said. Government bond yields are currently near record lows amid unprecedented monetary easing by the Reserve Bank of Australia and other central banks around the world. The Australian 10-year bond yielded 2.59 per cent on Wednesday in Sydney. It fell as low as 2.25 per cent in February after the RBA reduced its cash benchmark to that level.

Investors routinely ignore ratings companies' decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody's and Standard & Poor's suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg in 2012 on more than 300 upgrades, downgrades and outlook changes going back as far as the 1970s.

BLOOMBERG