Speaking at the CBA Global Market Conference in Sydney this week, S&P sovereign analyst Craig Michaels said Australia’s external debt is among the highest in the world.
Mr Michaels was discussing the reasoning behind S&P’s decision in July 2016 to downgrade’s Australia credit outlook to 'negative'.
The decision was accompanied by a one-in-three probability of a downgrade in Australia’s sovereign credit rating from AAA to AA+.
S&P is sceptical about the federal government’s ability to balance the budget by 2021, and it believes the government is being too optimistic about commodities prices.
Mr Michaels conceded that the federal government’s deficits “aren’t all that large” and that Australia’s net debt is among the lowest of sovereigns globally.
“Our concerns are really about the high level of external indebtedness, which in Australia’s case is one of the highest we’ve seen among sovereigns that we rate globally,” Mr Michaels said.
“In our minds it creates a very large vulnerability – if not a high likelihood – of negative events happening.”
If foreign investors are no longer willing to roll over debt or fund Australia’s “persistent” current account deficits there would be a “major impact” on the economy, Mr Michaels said.
The banking sector would be likely to suffer the worst consequences, he said.
“If that money were no longer available, credit would shrivel up, economic growth would shrink very rapidly, and that would all come back onto the government’s budget,” Mr Michaels said.
“And in a really negative scenario where bank asset quality was also hit very hard, it’s also possible the government would have to step in and support the bank system on top of supporting the economy in a very low revenue environment.
“So that’s the key vulnerability that we see, and that’s the key reason that we believe for a AAA rating the government’s finances need to be in a very strong shape.”