Standard & Poor’s warns Australia on AAA rating

Standard and Poor’s warns it could cut our prized AAA credit rating if the economy fails to bounce back from recession quickly.

Standard & Poor's says COVID-19 outbreak has dealt Australia a severe economic and fiscal shock. Picture: Bloomberg

The world’s biggest rating agency has become the first to warn it could cut the Australian government’s prized AAA credit rating if the economy fails to bounce back from recession quickly, pointing to “substantial deterioration” in public finances.

As the parliament meets to vote on the federal government’s $130bn wage subsidy package, Standard and Poor’s said it had qualified its AAA rating for Australia with a “negative outlook”, pointing out that net government debt would double by next year to 32 per cent of GDP.

“We could lower our rating within the next two years if the COVID-19 outbreak causes economic damage that is more severe or prolonged than what we currently expect,” it said in a statement.

“The COVID-19 outbreak has dealt Australia a severe economic and fiscal shock. We expect the Australian economy to plunge into recession for the first time in almost 30 years, causing a substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level,” the agency said.

The government has been at pains to stress the temporary nature of its $214bn of planned new spending, including the $130bn JobKeeper wage subsidy scheme, being rolled out to insulate the economy from social distancing measures that have shut down swathes of the economy.

S&P said the government’s relatively strong fiscal position would put it in good stead to ride out the economic shock. “While fiscal stimulus measures will soften the blow presented by the COVID-19 outbreak and weigh heavily on public finances in the immediate future, they won’t structurally weaken Australia’s fiscal position. This expected improvement is a key supporting factor of our ‘AAA’ rating,” the agency said.

“Australia’s general government budget, including the Commonwealth and subnational governments, will deteriorate sharply in fiscal years 2020 and 2021 as the economy moves into a COVID-19-induced recession and governments across the country implement large stimulus packages,” S&P said.

S&P has rated Australia AAA, the highest rating, since 2003, after having rated it AA+ since 1986.

The statement follows more upbeat analysis from rival agency Moody’s, which earlier this week said the federal government’s $ to curb the downturn was “unlikely” to threaten is AAA rating.

“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.

FitchRatings also issued an update earlier this week, 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.