Brexit! A weak Prime Minister! A ratings downgrade! We are all ruined!

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We have seen a slew of data this week which has made many an investor reflect on their strategy.

But in the World of property finance, once the smoke clears, it will become clear that there is not much to write home about.

Prompted by government deficits, a couple of rating’s agencies have now put Australian on a negative outlook.  At some point, it is likely that Australia will lose its AAA-rating.  And, as a result, overseas investors will expect a higher rate of return for the money they lend to Australia – these rates could well be reflected in our interest payments.

Quite why these ratings agencies retain their credibility after their shoddy work in the run-up to the GFC is beyond me – but that’s another story.

The truth is that other factors will kick-in to keep interest rates low.

There is consensus amongst economists that interest rates will drop next month due to an inflation level that is below the Reserve Bank’s comfort level.

And, if inflation remains low, there is scope for further rate cuts.

While many may see debt, deficit and rate cuts as bad news.  It is not all doom-and-gloom.

I would not be surprised if future governments delay the budget surplus further.  But, if this is due to good debt, is that a problem?

Malcolm Turnbull and Tony Abbott have both committed themselves to infrastructure spending.  Similarly the Baird and Andrews governments in NSW and VIC are both building roads and rail that will pump-prime our economies.

Is there a problem if this spending requires more debt, but which stimulates the economy to bring it back to surplus?

Other major economies have coped with less than AAA status and they don’t have the underlying strength of our economy.

Graeme Salt - Chan & Naylor Finance

Graeme Salt


 

Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

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