Australian Government Official Plays Down Impact Of Credit Rate Downgrade

Credit Rating DowngradedRob Nicholl, the chief executive of the Australian Office of Financial Management (AOFM) has said that the downgrade of credit rating for Australia from AAA to AA+ by Standard & Poor’s (S&P), the rating firm will have little impact on investments.

Speaking at an event in Sydney, Nicholl said that there have been no adverse market movements after the announcement which indicated the lack of impact.

In a statement Nicholl said,

Since that announcement [by S&P] I have been overseas talking to a number of investors and the feedback I've had during those discussions is consistent with our expectation from years ago and that is that most offshore buyers invest in our market for yield and liquidity, not for the credit rating. So, the prospect or potential for the credit rating to move from AAA to AA+ is not something that's attracting much attention among investors

Another rating firm Moody’s Investor Service has however reconfirmed its triple A credit rating for Australia and retained its stable outlook recommendation for its economy.

Nicholl also announced the government decision to launch Australia’s first 30-year government bond scheme. He warned that foreign interest was waning in providing debt to the Australian government as the sale of Australian bonds among foreign investors has dropped from 80 percent to 60 percent. The coverage ratio for the bonds has also declined in recent years due an increase in bond issues. The bidding on the 30-year bonds will open in the second week of October.

The Australian government has previously focused more on the shorter term for its bonds. Last year around 60 percent of government bonds was for more than 8.5 years but in 2008-09, the percentage was just around 25 percent. The 30-year bonds are part of an effort by AOFM to lengthen the term of the government’s debt as it reduces exposure to volatility in interest rates and refinancing risk.

The declining interest rate trends across the globe has seen the average cost of borrowing of the Australian government drop from 5.18 percent in 2009 to 3.5 percent in 2016. Australia’s sovereign bonds however have in fact higher rates than other developed countries, many of whom have negative interest rates.

Analysts at ANZ Banking Group have said that the gap in yield between U.S. Treasury bonds and Australian government bonds could affect the interest of foreign investors in Australian bonds especially considering that many expect the U.S Fed to hike interest rates soon. Last year AOFM borrowed almost $97 billion and is planning to borrow a similar amount this year in order to bridge the deficit in income and to refinance loans.