The Effects of the Change of Prime Minister on Australia’s Sovereign Rating

Last month was marked by the ousting of Malcolm Turnbull as Prime Minister and the election of Scott Morrison as his replacement.  Almost as soon as Scott Morrison was announced as the new Prime Minister, Moody’s Investor Service confirmed the change of leadership had no impact on Australia’s credit rating.  According to Moody’s “Australia’s Aaa rating is supported by the country’s very high level of economic strength and moderate level of government debt” however Moody’s hinted the rating will be dependent on the continuation of the same broad fiscal policies that occurred under the Turnbull government when Morrison was Treasurer.

Subsequent to the leadership change, the coalition government was savaged in recent polls and infighting appears to continue with Turnbull pushing for Dutton to be referred to the high court over his eligibility to sit in parliament, Tony Abbott continuing as member for Warringah despite many calls for him to step down, local liberals rejecting Scott Morrison’s call for them to select a female candidate for the upcoming Wentworth by election and allegations of bullying of female Liberal MP’s.  These developments seem to significantly increase the chances of a Labour government being elected in May 2019 if not before.

The political events last month are more likely to increase the chances of inflation and interest rate rises in the medium to longer term and perhaps a downgrade of the sovereign rating if increased spending by a Labour government is funded by increased debt (as per the Moody’s comments).  The best advice therefore is for clients to ensure their investment policies can withstand a downgrade of Australia’s AAA/Aaa/AAA rating as if the country were to lose its AAA rating from S&P, this would automatically lead to a downgrade of the major banks from AA- to A+.  It is this event that would cause breaches of most clients’ investment policies rather that the sovereign downgrade itself.

There is clearly time to implement these policy changes as a change of government does not seem imminent, but it is worthwhile updating any ratings bands within the investment policy that are current described as “AA+ to AA- rated” to “AA+ to AA- rated or major bank” at the next review.  We have already addressed this issue with most of our clients, but please feel free to contact us should you have any concerns or would like to seek advice from Amicus.   Amicus generally reviews its retained clients investment policies on an annual basis and has been contracted on a project basis to review investment policies for a wide range of clients across local government (in various states), corporates, educational institutions, charities and church groups among others.

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