Aust. long-term debt downgraded

Press, 26 October 1989, Page 29

Aust. long-term debt downgraded

NZPA-Reuter New York Standard and Poor's Corporation said it lowered Australia’s long-term debt rating to AA from AA-plus and affirmed its Al-plus short-term debt rating. It said the downgrade, affecting $10.4 billion in direct and guaranteed debt, reflected Australia’s sharply higher current account deficit, prospects for protracted external adjustment, and increasingly heavy foreign debt burden.

S and P said the weakened external position raised the country’s vulnerability to adverse international economic developments and constrained policy flexibility. S and P said that, after two years of decline, Australia’s current account deficit rose to 5.2 per cent of gross domestic product in the fiscal year ended in June.

It said a deficit of similar magnitude was expected in fiscal 1990. Australia’s net external debt rose to 200% of total exports in June. S and P said rapidly growing private-sec-tor borrowings more . than offset lower Commonwealth external debt.

Over the next two years, lower import demand and higher export volumes were expected to gradually narrow the current account imbalance, S and P said. However, the rating agency said Australia’s growing foreign interest payments would slow the process of stabilising external debt. It said the recent external

imbalances, which occurred despite a sizeable increase in the terms of trade, were largely due to rapidly rising private demand for capital goods and, to a lesser extent, for consumption goods. However, the Treasurer, Mr Paul Keating, said the debt rating downgrade did not reflect the country’s credit record and its "absolutely unquestionable capacity to service and repay its debt in any currency.”

He said the decision was “not an unexpected development” since the New York based credit rating agency, Moody’s Investors Service, had already downgraded Australia’s rating in August. "Although the Government totally rejects the need to downgrade Australia’s rating it can understand that Standard and Poor’s had little alternative given their competitor, Moody’s, had already done so two months earlier,” Mr Keating said. He said the methodology used by the agencies for rating the debt issued by countries such as the Commonwealth of Australia was “flawed.” “The Commonwealth of Australia has an impeccable credit record and an absolutely unquestionable capacity to service and repay its debt in any currency,” he said. "Indeed, for some time now the Commonwealth has actually owed no net overseas debt.

“Our foreign currency debt currently stands at SBB. com-

pared with some S2OB of international reserves.” Mr Keating said the Commonwealth had not borrowed overseas for more than two and a half years and was instead repaying both domestic and overseas debt. “Moreover, this year’s Budget surplus of $9.18 is large enough to repay all of our external debt,” he added. “However, there is a strong and continuing demand by overseas investors for Commonwealth securities. This is reflected in the difficulty we have in prising stock out of the hands of overseas holders.”

Because of its downgrade of Australia’s long-term debt, S and P said it also lowered its “sovereign ceiling” rating on the long-term debt of 11 Australia-based issuers. This affects about S9B of debt. The Australian Industry Development Corp’s AAArated issue and the AA-plus Fanmac Premier Trust structured financings — all of which are issued in Australia’s domestic capital market — are affirmed. Shortterm ratings also are affirmed.

S and P said the sovereign ceiling downgrades do not reflect a deterioration in these issuers' underlying credit quality..

It said the action was in accordance with its policy that no issuer be assigned a rating higher than the one S and P assigns to that issuer’s country of domicile.