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Australia’s AAA rating safe – for now

Australia’s AAA credit rating is safe for now, but could be at risk of being downgraded, according to ratings agency Standard & Poor’s (S&P).

In a report entitled “Australia Has More Than Luck To Endure Downside Risks”, S&P highlights the key risks as a sudden deterioration in investor sentiment, a sharp slowdown in China and plunging house prices.

While Australia’s top notch AAA rating is supported by strong fundamentals, the nation does have some weaknesses such as high offshore debt, and banks which are reliant on foreign investor funding. That may no longer be such an issue, with recent reports suggesting that the banks, including ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australian Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) source more than 60% of their current funding requirements from deposits.

S&P highlights that Australia is unique amongst its global peers for its weak external position, caused by decades of current account deficits. The agency also warned that household indebtedness, which has soared since the 1990s to fund surging house prices, has not been tested in an environment of high unemployment for a long time.

“While there has not been a buildup of aggregate excess supply, the housing market continues to appear somewhat vulnerable to a downturn, in our view,” S&P said.

S&P also warned of the exposure of our banks to both large external and household debt.

Just last week, the United Kingdom (UK) had its AAA rating downgraded by Moody’s to Aa1, citing slow growth and a rising debt burden.

Foolish takeaway

Australia is in good company – Germany and Canada are the only other G20 economies that have spotless AAA ratings, although S&P have suggested in the past that Australia is expected to be the only AAA-rated country by 2030, with other developed nations falling off the perch thanks to their ageing populations.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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