20 April 2024
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The world’s debt-watcher and credit-ratings agency, Standard & Poor’s, has warned Australia about its rising government deficits and debt, suggesting if we don’t look out we could lose our AAA-credit rating, which could lead to higher interest rates.
And while it’s a story that shouldn’t be ignored, I do really think it’s more like a teacher’s warning to one of the best kids in the class to ensure we remain the teacher’s pet along with very few other countries.
If a country gets itself into excessive debt, it can mean the country’s credit rating can be downgraded. This can drive the currency down and force interest rates up as we borrow from overseas. And like in the banking world, if you’re a little bit ‘dodgy’, you pay higher interest rates when you borrow.
As the legendary comedian Bob Hope once put it: “A bank is a place that will lend you money if you can prove that you don't need it!”
And the AAA countries find it easier to get money and at good rates — and there aren’t many of them. Here’s the list: Australia, Canada, Denmark, Germany, Hong Kong, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland.
Note no there’s no UK, USA, France, Italy, Japan, Spain, etc.
The USA lost its AAA rating after the GFC in 2011. The stock market didn’t like the news on the day it was announced. In fact, I was in Melbourne at the Convention Exhibition Centre, opposite Crown, in what used to be called Jeff’s Shed, after the Premier — Jeff Kennett — who commissioned the building.
It actually was an expo on investing and all the exhibitors weren’t happy that the market was crashing that day. No one knew exactly what the US losing its AAA-rating would mean but a lot of people sold first and asked questions later.
It happened in August, but a year later the US stock market was up 10%. So I see that as the real test of just how bad it is to go from a AAA rating to a AA+ rating. And this chart actually shows how the US stock market reacted for years after. You can’t help but think that the real impact is minimal.
S&P 500 August 2011-Today
This chart actually shows the rate of rise of the US stock market actually picked up after the event of the Yanks being downgraded!
I can see that Standard &Poor’s is giving us a warning with our combined government deficits of the Federal Government and the states adding up to 14% of GDP. S&P says this is not consistent with a AAA country, but these are strange, Coronavirus-created times and the agency should not be using old pre-pandemic criteria to assess our debt and deficit levels right now.
The Federal Government’s deficit to GDP is about 10% of GDP. The treasurer is aiming for this to shrink to 3% of GDP by 2023-24. Provided we grow as fast as is currently predicted, then I reckon he’s a good chance of pulling it off.
On the other hand, if we’re too slow getting our deficit down, then we could lose our triple A rating. That could lead to higher borrowing costs for governments, weaken the dollar and could pressure home loan interest rates to rise.
That said, Australia is like a business with lots of debt but with great current sales and a very positive outlook, despite China playing hardball at the moment.
Only this week, the OECD did not see problems for the Aussie economy and upgraded our growth for 2021 from 3.2% to 4.5%. That compares to our long-term average of 2.8%.
And growth is the key. If Australia grows strongly, then tax collections rise from more employed workers and more successful, profitable businesses. If this happens, there is less government spending on the unemployed and assistance to struggling businesses because there are less of them.
My economic guess is that we could see a rerun of the Roaring 20s over the next few years because of the low interest rates and huge government spending to make up for the economic devastation in 2020 because of the Coronavirus. If I’m right, then we will see our deficits shrink and our AAA rating will be kept.
By the way, at the end of 2020 the latest list of countries and their Government Debt-to-GDP was produced by tradingeconomics.com. And this is what it showed:
I rest my case.
And remember what we achieved until the world was slammed by a once in 100-year pandemic. This is how Bloomberg remembered it as the virus forced all economies into recession: “Australia’s almost 29-year recession-free run has come to a close, ending the developed world’s longest uninterrupted economic growth streak.”
Conclusion? Don’t worry about this S&P warning. Be happy that we are world class ‘students’ of getting economics right.
