Fitch cuts Australia's sovereign outlook to negative, affirms 'AAA' rating

SYDNEY (Reuters) - Fitch Ratings downgraded its outlook on Australia’s coveted ‘AAA’ rating on Friday to “negative” from “stable”, citing the heavy blow to the economy and public finances from the COVID-19 pandemic.

FILE PHOTO: A woman crosses an almost empty street near of a coronavirus warning sign during a workday following the implementation of stricter social-distancing and self-isolation rules to limit the spread of the coronavirus disease (COVID-19) in Sydney, Australia, March 31, 2020. REUTERS/Loren Elliott

It affirmed Australia’s prized rating but said a downgrade was possible in the absence of a sufficient post-coronavirus fiscal consolidation strategy or in the face of economic or financial sector distress.

The move follows a similar action by global ratings agency S&P last month. Australia is facing its deepest recession on record and the first in about three decades even as it relaxes anti-virus measures and re-opens its economy sooner than expected.

Australia has reported just over 7,000 COVID-19 infections with 101 deaths, well below several other advanced nations.

In an effort to cushion the blow to its economy, the government has announced a A$194 billion (104.2 billion pounds) fiscal stimulus package while the central bank has slashed interest rates to a record low and launched an “unlimited” quantitative easing programme.

Despite the measures, Fitch forecast Australia’s A$2 trillion economic output to shrink 5% this year.

“Risks are tilted to the downside given uncertainties around the spread of the coronavirus domestically and globally,” Fitch said.

It expects fiscal deficits to swell at both the federal and state levels, with the gross government debt seen jumping to 58.2% of gross domestic product by June 2021 from 41.9% last year.

“This stands well above the current Fitch forecast ‘AAA’ median of 44% of GDP in 2021,” it pointed out.

In addition, household debt, at 186.8% of disposable income, is also among the highest of ‘AAA’ rated sovereigns and poses an economic and financial stability risk, the ratings agency said.

Fitch also forecast a return to a slight deficit of 0.2% of GDP in 2020 and 0.7% in 2021 from surplus of 0.6% in 2019.

($1 = 1.5225 Australian dollars)

Reporting by Swati Pandey; Editing by Kim Coghill