Victoria’s credit rating downgraded

Victorian Treasurer Tim Pallas says Monday’s downgrading of the state's credit rating, to the lowest of any state or territory, will make little difference to the state’s finances.

Standard & Poor’s downgraded Victoria from a AAA rating to AA, taking the state’s rating down by an unusual two notches. The agency said the state’s "substantial and prolonged lockdown" had left it in more fiscal trouble than the rest of Australia.

Victorian Treasurer Tim Pallas.Credit: Paul Jeffers

Mr Pallas said the move by S&P was "not unexpected" and that Treasury expected the downgrade to add about $10 million to the annual cost – expected to be about $2.8 billion this year – of Victoria’s burgeoning public debt.

The views of credit ratings agencies such as S&P are politically charged because they strongly influence the rates at which treasuries can borrow money on international markets. A high rating allows cheaper debt.

Victoria has held its AAA rating with S&P for nearly 18 years and has not been downgraded by the agency since 1989.

But economists were unfazed on Monday, predicting that Victoria’s downgrade and that of NSW, which had its AAA rating trimmed to AA+ by S&P, would make little material difference to the states’ finances.

There was an immediate political effect, with Victorian Opposition Leader Michael O’Brien and his shadow treasurer, Louise Staley, calling a snap press conference to declare Monday a “sad day for Victorians”.

Following the state government’s big-spending budget last month, fuelled by a borrowing program that is set to take net debt to nearly $155 billion in the next four years, S&P, and the other big ratings agency, Moody's, flagged they would review their advice to investors on Victoria.

Moody’s has not yet announced the result of its review.

ANZ Bank rates strategist Heyden Dimes said the two states should be able to take the downgrades in their stride because “those low interest rates are here to stay”.

The economist said the Reserve Bank of Australia was backing the states’ borrow-and-spend strategy by effectively lending them money at very low interest rates.

“This shouldn’t be an issue for the states in servicing their debts, especially when you’ve still got the Reserve Bank in the background ready to buy $16 billion in bonds in the next six months,” Mr Dimes said.

RMIT economics professor David Hayward concurred with the analysis of his private-sector colleague.

“This was probably to be expected,” Professor Hayward said. “But interest rates are so low that it’s not going to make a lot of difference.”

In its briefing note, S&P predicted the state would run big deficits for years to come and it had largely run out of assets to sell to help prop up its budget position.

“Victoria’s economy has been affected more significantly than other Australian states and territories, mainly because fallout from the second wave of [COVID-19] infections resulted in a substantial and prolonged lockdown,” S&P wrote.

Mr Pallas at the Victorian budget presentation last month.Credit: Joe Armao

“In our view, the Victorian government’s path to fiscal repair will be more challenging and prolonged than other states because of the significant increase in debt stock projected over the next few years.”

Mr Pallas said he was disappointed by the downgrade but that he and his colleagues had always known their budget strategy made the move likely.

“Nobody wants to lose a credit rating, but we did it in the knowledge of how the agencies set their ratings,” the Treasurer said.

“The choice that we made was that we could hoard a credit rating or we could apply it in the interests of the Victorian people and businesses.”

Mr Pallas repeatedly claimed the backing for his fiscal strategy from Reserve Bank governor Philip Lowe, who told a parliamentary committee in Canberra last week that a credit ratings downgrade "doesn't concern" him.

"What I want to see is strong public finances in Australia," Mr Lowe said.

"I think we have that and we're going to continue to have that.

"The AAA credit rating had more political symbolism than economic importance."

But Mr O’Brien said on Monday that S&P’s announcement was an indictment of Labor’s economic management.

“It sends a message that this government simply cannot manage money,” he said.

“What we’ve seen with this Labor government is debt, deficit and now a double downgrade.

“This is going to cost every single Victorian family; it means higher taxes and charges and less into schools and hospitals.”

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