SYDNEY, Australia — Even as global economic worries move investors to pour their money into seemingly stable Australia, political deadlock is jeopardizing the country’s long-held image as a financial haven.
On Thursday, Standard & Poor’s, one of the leading credit-rating firms, warned that it could strip the country of its top-grade investment rating in the next two years. Among other reasons, S.&P. cited the inconclusive results of Australia’s election on Saturday, which left no clear winner to grapple with the country’s budget issues.
The move did not appear to immediately unsettle investors, who drove Australian share prices up on Thursday and drove the value of Australia’s currency down only modestly before it bounced back. But the warning from S.&P. suggests that one of the few remaining financial sanctuaries is no longer a sure bet.
“There is still a degree of tolerance for Australia among foreign investors,” said Shane Oliver, an economist at AMP Capital. “But this will cause some investors to question where we’re heading.”
With only about 24 million people, Australia has the world’s 12th largest economy, larger than those of countries like Russia and Mexico. Rich in raw materials like iron ore and natural gas, Australia has benefited from the rise in recent years of China and other Asian economies. Australia holds a rare distinction: It has not had a recession — defined as two consecutive quarters of economic contraction — in 25 years. Its economy expanded 3.1 percent for the year that ended in March, outpacing growth rates in the United States and Europe.
That has led S.&P. and its rivals, Moody’s Investor Service and Fitch Ratings, to give Australia the highest ratings they can bestow. Top ratings attract investors looking for safe bets. In return, top-rated countries enjoy low borrowing costs.
Australia is a member of an increasingly exclusive club of countries labeled triple-A by major ratings firms, a list that has been winnowed in recent years by the global financial crisis and rising debt levels. S.&P. stripped the United States of its triple-A rating five years ago. The move led to criticism by United States officials that ratings firms showed during the 2008 global financial crisis that they have little grasp of true financial risk. Moody’s downgraded Britain in 2013. Only 10 countries now enjoy the top rating of the three firms, including Canada, Germany and Singapore.
China’s slowing economic growth and gradual shift away from heavy industry has dented its appetite for Australia’s minerals and energy. Its government spending and overall borrowing have continued to rise.
The election on Saturday further clouded Australia’s prospects.
Analysts believe the conservative Liberal National coalition will limp back into office, securing a wafer-thin majority of 76 seats in the 150-seat House of Representatives. But Prime Minister Malcolm Turnbull has lost his significant majority in the lower house and will struggle with a Senate likely to be dominated by minor parties, weakening the ability of major parties to push through changes.
“We believe fiscal consolidation may be further postponed,” S.&P. said in a statement, adding that “there is a one in three chance that we could lower the rating within the next two years” if Australia did not narrow its budget deficit.
Both of Australia’s major parties have run up large deficits. After the Liberal coalition was voted into office in 2013, then-Treasurer Joe Hockey delivered a 2014 budget aimed at reducing the debt he said had been incurred by the previous incumbents, the Labor Party. But many of Mr. Hockey’s measures failed to gain support.
Since then, the government’s current projection of a return to a balanced budget has stretched to 2021, Standard & Poor’s said.
Both major parties have tried to navigate the economy away from a reliance on mining income and toward services, like education. Mr. Turnbull campaigned on a platform of tax cuts for businesses, which he said would bolster economic growth and create jobs, though his pledge did not appeal to many voters.
The Labor Party’s pledges to spend on health and education would have deepened the deficit by $12.3 billion over the next four years. It said the budget would return to surplus over the long term, in line with the government’s projections.
The BT Financial Group’s chief economist, Chris Caton, said that the loss of the triple-A rating was not inevitable, given Australia’s growth rates and low jobless rate. Still, he said, about 60 percent of Australia’s bonds are held by overseas investors, exposing it to potentially higher borrowing costs.
For the moment, investors worried by Britain’s vote to leave the European Union, China’s slowdown and other uncertainties have been more than willing to give Australia their money. The value of Australia’s dollar has strengthened against the American dollar, rising to about 75 cents from about 69 cents early this year.
The yield on Australian government bonds, which falls as demand for them increases, has also dropped to record lows. The annual yield on benchmark 10-year Australian government debt had fallen to less than 1.9 percent as of Thursday from about 2.8 percent at the start of the year.
Continue reading the main story