KONTAN.CO.ID - SYDNEY. Global ratings agency S&P on Wednesday lowered its outlook on Australia's coveted 'AAA' rating to "negative" from "stable" in anticipation of a "material" weakening in the government's debt position as it splashes out a large fiscal stimulus package.

S&P affirmed Australia's prized rating but said a downgrade was possible within the next two years if the economic damage from the COVID-19 outbreak is more severe or prolonged than it currently expects.

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Australia is among a handful of countries in the world to boast the best ranking from all three major ratings agencies.

But it has come under a cloud as the pandemic has dealt Australia a severe economic and fiscal shock, with S&P predicting the A$2 trillion ($1.23 trillion) economy would plunge into recession for the first time in nearly 30 years.

This would cause a "substantial deterioration of the government's fiscal headroom at the 'AAA' rating level," S&P said in a statement.

Treasurer Josh Frydenberg said the outlook downgrade was "a reminder of the importance of maintaining our commitment to medium term fiscal sustainability."

The government has pledged A$320 billion ($197.73 billion) in fiscal spending, or 16.4% of annual economic output, to backstop the economy and prevent a crisis as the pandemic shuts companies and leaves many unemployed.

Editor: Herlina Kartika Dewi