S&P Global Ratings downgraded the outlook on Australia's sovereign ratings to negative from stable as the outbreak of coronavirus, or COVID-19, weakens public finances.
The downgrade reflects a 'substantial deterioration' of its fiscal headroom at the 'AAA' rating level, the agency said in a statement on Wednesday.
The outbreak of coronavirus has posed a severe economic and fiscal shock. The Australian economy is set to plunge into recession for the first time in almost 30 years, causing a substantial deterioration of the government's fiscal headroom, S&P noted.
However, the large budget deficits that are projected for fiscal years 2020 and 2021 are likely to be temporary and do not represent a structural weakening of fiscal performance, S&P said.
The ratings were affirmed at 'AAA'. S&P observed that the triple A rating on Australia benefit from the country's strong institutional settings, its wealthy economy, and monetary policy flexibility.
However, high external and household indebtedness as well as its vulnerability to weak commodity export demand moderate these strengths.
The government's large fiscal stimulus will somewhat soften the blow presented by COVID-19 and support the recovery efforts.
According to S&P, economic growth will fall to 1.3 percent in fiscal 2020 before picking up to 2 percent in fiscal 2021 and about 4 percent in fiscal 2022.
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