One of the world's largest credit rating agencies has warned that Australia risks losing its top investment ranking if the budget deficit does not improve.

Standard & Poor's has warned that continued parliamentary gridlock or an economic shock from overseas, such as more big falls in commodity prices, could see Australia lose its AAA credit rating.

"We could lower the ratings if Australia's budgetary performance does not improve broadly as we currently expect," Standard & Poor's (S&P) said in its latest report.

But the report reaffirmed Australia's credit rating at AAA, citing its resilient economy, strong public policy and monetary and fiscal flexibility.

China's slowing economy and oversupply of iron ore has lowered demand for Australia's biggest export earner, hitting government revenue.

Craig Michaels, director at Standard & Poor's, said that could further blow out Australia's budget deficit.

"Where we are seeing the bigger impact from our perspective is the falls in commodity prices and how that's flowed through to government revenues," Mr Michaels said.

"The Commonwealth Government, for a number of years, has been projecting budget deficits to narrow and for the government to get back to surplus."

"Those forecasts have proven to be too optimistic over the past few years mainly because of the impact of falling iron ore prices."

The Federal Government estimates the budget will return to surplus by 2020 from a deficit of $35 billion in the May budget.

But some budget measures lack support from opposition parties in the Parliament.

Mr Michaels said that was another risk to the AAA rating.

"We are looking for the Government to get some actual runs on the board now in terms of budget deficits narrowing considerably over the next few years," he said.

"There isn't as much room for the sort of fiscal slippage we've seen in the past few years to continue if the rating is to remain at AAA level."

Another financial shock could push up cost of borrowing

But Mr Michaels added there had been progress on some budget policies in the past couple of months.

"The Parliament seems to be more constructive in getting some budget repair measures through but there are still some measures which haven't passed or haven't reached agreement with opposition parties yet," he said.

Another weakness is Australia's dependence on foreign capital, especially borrowing by the banks to lend to customers and a high level of household debt.

Another financial shock or crisis overseas could push up the cost of borrowing.

Despite the risks, Mr Michaels said the likelihood of Australia losing its AAA credit rating was low because of its wealthy economy and strong financial system.

"We affirmed the AAA credit rating on Australia and also maintained the stable outlook, which means we see a less than one in three chance of a change to the rating over the next two years," he said.

Sean Callow, senior currency strategist at Westpac, also said it was unlikely Australia would lose its top investment ranking.

"Our credit team is not really thinking that it's a very likely prospect anytime soon and that was pretty clear in the report," Mr Callow said.

"Yet the market just seized upon the caveats right at the end and that's an indication of how negative the Aussie dollar mood is at the moment," he said.