S&P reaffirms Australia's stability with another AAA rating

Standard & Poor's has reaffirmed Australia's AAA credit rating just months from the federal election.

Standard & Poor's has reaffirmed Australia's AAA credit rating just months from the federal election.

The agency issued the annual rating despite a recent fall in the terms of trade and a steep decline in the dollar. The dollar has brushed US90¢ in recent weeks after spending the past couple of years near parity with the US dollar.

The stable rating has been maintained after some deterioration in public finances since the financial crisis. Australia remains one of eight countries with a AAA rating from all three big credit-rating agencies.

The main reasons for S&P's vote of confidence include Australia's public policy stability, economic resilience and flexible fiscal and monetary policy.

S&P credit analyst Craig Michaels said Australia had a "strong ability" to absorb large economic and financial shocks, "as was demonstrated during the global recession in 2009. [However], moderating these strengths are Australia's high external imbalances, dependence on commodity exports, and high household debt."

Treasurer Chris Bowen, who has been in the role for three weeks, was quick to trumpet the news.

"This decision is further testament to the resilience of the Australian economy and the prudent economic management of the Labor government," he said.

S&P notes that Australia's public finances have worsened in the past few years, but the deterioration has been "more contained" than for many AAA-rated peers.

It also said it expected the government sector's budget balance to post "relatively small and declining deficits as a share of GDP".

It expected the federal budget to be "broadly in balance" by 2016.

Despite the stable rating, S&P said risks remained for Australia's growth prospects and credit quality, and these stemmed largely from its "growing dependence on trade with China".

"However, while robust demand for its commodities continues - from emerging Asia, and particularly China - we believe Australia's economic prospects over the forecast period will remain favourable."

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