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S&P warns Australia’s AAA credit rating is still vulnerable

Standard & Poor’s is one of the largest credit rating agencies in the world. It is the name behind many of the indices we invest in like the S&P/ASX 200 and the S&P 500.

I’m sure many readers will have already seen the highlights of the budget, which included tax cuts for nearly every taxpayer, more funding for the elderly and an infrastructure bonanza.

Some market commentators are saying that the $1,000 tax cut for many households could lead to a boost for the economy as a lot of people are likely to spend the money. Of course, spending money makes our economy go round, so it could be a boost for the share market. Businesses like Wesfarmers Ltd (ASX: WES), Woolworths Limited (ASX: WOW) and Nick Scali Limited (ASX: NCK) could all see a boost in earnings, which is why their share prices went higher today.

Some cynical people have said this is just a pre-election budget and it would have been better for the country to return to surpluses sooner so that the huge debt can start to be repaid.

But, the worry for S&P is that the global economy is moving closer to a downturn and this could affect Australia significantly. The strong global economy has helped the budget significantly in the past few months, a weak global economy could weaken the budget.

According to quotes in an article in the AFR, S&P said “Global trade tensions, coupled with rising investing aversion to emerging markets in recent months, may dampen economic growth among Australia’s key trading partners.

“As such, risks to the government’s plan for an earlier return to budget surpluses are significant. The outlook on the long-term Australian sovereign ratings remains negative for now to reflect these uncertainties.”

The credit rating of Australia is critical for our economy. Our banks are able to access credit at the lowest rate from overseas, if our rating was downgraded then the interest cost for banks would increase and the interest rate on mortgages would increase. This would not be good for the bank stocks like Commonwealth Bank of Australia (ASX: CBA) or discretionary businesses like Nick Scali or households.

Foolish takeaway

Ultimately, an investor shouldn’t worry too much about credit rating changes if their portfolio is full of quality growth shares that will continue to grow profit over the long-term, like Altium Limited (ASX: ALU), Challenger Ltd (ASX: CGF) and Ramsay Health Care Limited (ASX: RHC).

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Motley Fool contributor Tristan Harrison owns shares of Altium, Challenger Limited, and Ramsay Health Care Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited and Wesfarmers Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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