Standard & Poor’s says Australia’s top-tier AAA status is not in immediate danger after cutting the ratings of the nation’s two largest states this week.
The global credit rating agency downgraded the long-term ratings of NSW and Victoria on Monday – both losing their AAA status as casualties of the pandemic.
“No rating action on a state or territory impacts the sovereign,” S&P director of sovereign and public finance Anthony Walker assured a webinar on Wednesday.
Australia is rated AAA with a negative outlook.
It is one of just nine countries to have such a rating from all three main agencies, which includes S&P, Moody’s Investors Service and Fitch Ratings.
A rating downgrade does potentially raise the cost of borrowing for a country, state or entity.
While the agency expects Australian federal budget deficits will narrow over coming years, there is a risk they don’t and why a downgrade in the next two years remains a possibility.
Even so, Australia is enjoying a fast recovery from recession.
Mr Walker said S&P had been more optimistic on the outlook than Treasury, the Reserve Bank and the International Monetary Fund.
“So there is a chance we will get better outcomes,” he said.
“As to whether it’s enough to revise the outlook to stable, we will take some more time to assess that.”
The Reserve Bank’s bond purchasing program aimed at keeping market interest rates low is helping all ratings in Australia.
“Without that we may have had more actions,” Mr Walker said.
“Interest costs are much lower today than they would have been otherwise without the RBA stepping in.”
Mr Walker does not expect Australia’s trade stoush with China will be enough to impact the sovereign rating, although unless exporters diversify it could have long term consequences for individual sectors.
“As long as China is buying our iron ore, which they have little choice at the moment, it’s going to be okay for the sovereign,” he said.
NSW was lowered to AA-plus on the state’s rising debt burden, while Victoria was cut two notches to AA after being dealt a “severe economic and fiscal shock”.
Explaining the difference between the two decisions, associate director Martin Foo said NSW was expected to return to a surplus by about 2022.
But for Victoria, hit by a second COVID-19 wave, the surplus does not occur within S&P’s three-year forecast horizon
Despite the downgrades “NSW and Victoria do still rank among the most credit worthy entities on our global rating scale”, Mr Foo said.
Fitch, in its global 2021 outlook for sovereigns, expects uncertainties over COVID-19 and its immediate and longer-term economic implications will continue to exert pressure on global public finances in 2021.
“The record number of sovereign rating downgrades in 2020, at more than 30, will be followed by another year of credit stress in 2021, as about one-third of the global sovereign portfolio is assigned a negative outlook,” it says.
Fitch also put Australia on a negative outlook in May, reflecting a significant deterioration in public finances as a result of the pandemic.