Coronavirus spending unlikely to threaten AAA rating: Moody’s

Coronavirus rescue spending is not likely to threaten Australia’s AAA rating, says Moody’s, despite warnings of ballooning debt.

Moody’s says Scott Morrison’s unprecedented $214bn in spending commitments ia “unlikely” to threaten Australia’s treasured AAA debt rating, despite UBS projections that the country’s debt level will hit its highest level since the 1950s.

Moody’s Investors Services analysts on Monday said they expected a “weakening” in the government’s fiscal position, but said Australia’s budget and national balance sheet entered into the crisis with the “flexibility and capacity” to meet the challenges of the health crisis.

“The packages are unlikely to generate significant downward pressure on the sovereigns' credit profiles because both governments have effectively reduced fiscal deficits alongside strong levels of economic growth over the last decade,” Moody’s said.

“Moreover, their swift action highlights their strong institutional capacity and an ability to rapidly craft emergency fiscal responses, particularly as scaled-up travel restrictions and social distancing measures will further weigh on economic activity.”

Australia, alongside New Zealand, is one of a dozen economies rated by Moody’s as AAA – the strongest possible score.

FitchRatings also issued an update, saying that the fallout from the health crisis will “exert pressure on credit metrics in Australia”, but that its ratings assessment “will also take into account the record of prudent fiscal management” in our country.

Fitch rates Australian Commonwealth debt as AAA.

Fitch analysts said while Australia’s stimulus package is expensive – equivalent to around 10 per cent of GDP so far – the measures “have been designed to be short-term in nature”.

“We are relatively confident about the governments’ ability to roll back support measures once the shock has dissipated,” they said.

The government a week ago announced its $130bn JobKeeper wage subsidy scheme, the most significant of a variety of measures introduced to cushion the blow to businesses and jobs from the coronavirus pandemic. The associated social distancing measures have closed large swathes of the economy, with analysts predicting the biggest economic contraction in history over the June quarter.

To pay for the additional spending, UBS economists expect government debt to surge by $500bn in the coming 15 months, bringing the total burden to $1.5 trillion. Debt as a percentage of GDP would move from just above 40 per cent, to around 80 per cent, they say.

The Reserve Bank of Australia is buying around $3bn in government securities each day as part of its commitment to keep yields low. At this rate, the RBA could buy all that additional $500bn in just six months, UBS said, which will keep bond rates capped at 0.5-1 per cent and the government’s interest bill under control.

“Incredibly, this keeps Commonwealth government interest payments broadly unchanged at under $20bn, or about 1 per cent of GDP over coming years,” the UBS economists said.

Moody’s believe the Australian economy will record zero growth in this financial year, before growing by 2.9 per cent in the next. UBS is more pessimistic, predicting the economy will shrink by 1.5 per cent in FY20 and by a further 1.9 per cent in FY21.

The Fitch analysts warned that picking the eventual toll on the economy was difficult.

“Uncertainty remains over the extent and duration of lockdowns, both domestically and overseas (which will affect exports),” they said. “There is also a danger that even after the spread of the virus is brought under control, re-emergence of infections could prompt a second wave of disruption.”