Australia has managed to hold on to its prized triple-A rating despite the federal government forecasting a deterioration in the budget bottom line in the medium term.
The three major ratings agencies on Friday reaffirmed the country's rating and outlook after treasurer Scott Morrison delivered the mid-year budget review, putting to rest fears in the market that deteriorating government finances could trigger a downgrade that could in turn push up borrowing costs.
"The government's decision to maintain the objective of a balanced budget by 2020-21 denotes continued commitment to fiscal consolidation," Moody's said.
"However, meeting the fiscal targets will be difficult in an environment of weaker nominal GDP growth."
Despite expecting budget deficits to be larger and longer-lasting than forecast in MYEFO, Moody's said the ability of the economy's resilience and the vigilance of policymakers would allow Australia to maintain its triple-A credit rating.
The government significantly downgraded its economic growth forecasts following shock September quarter growth figures which showed the economy posted its worse performance since the global financial crisis.
Economic growth is now expected to come in at two per cent in 2016/17, down from 2.5 per cent expected in the May budget, and will remain below trend at 2.75 per cent in 2017/18, down from the previous estimate of three per cent.
Moody's said the treasurer's decision to factor in a fall in commodity prices in the mid year review, despite the recent surge in iron ore and coal prices, reflected "credit-positive fiscal prudence".
Fitch acknowledged that Australia's fiscal position had deteriorated considerably since the global financial crisis, eroding the country's buffer against shocks such as a housing market downturn or further weakening of the global economy.
"However Fitch expects Australia's public debt ratios to remain in line with the 'AAA' median, even under Fitch's more conservative estimates of the pace of deficit reduction," the ratings agency said in a statement.
S&P Global Ratings said while there was no immediate impact from the budget update on Monday, the government's worsening fiscal position forecast will put further pressure on the rating.
"We remain pessimistic about the government's ability to close existing budget deficits and return a balanced budget by the year ending June 30, 2021," S&P said.
"Over the coming months, we will continue to monitor the government's willingness and ability to enact new budget savings or revenue measures to reduce fiscal deficits materially over the next few years."