Standard & Poor’s warns states that Covid-19 lockdowns risk credit ratings

Standard & Poor’s has warned that states which persist with lockdowns will be putting their credit ratings at risk.

Only by ending rolling lockdowns can Australia be confident it will maintain its AAA credit rating. Picture: Getty Images

Standard & Poor’s has warned that states which persist with lockdowns to control Covid-19 outbreaks even once vaccination rates reach 80 per cent will be putting their credit ratings at risk

S&P Global Ratings lead sovereign analyst Anthony Walker said achieving high enough vaccination rates by November to allow Australians to live with Covid without lockdowns was a “key assumption” underpinning the country’s AAA debt rating.

In a new report, S&P modelled the impact of two further outbreaks at the end of this year and the start of the next and found they would add at least $30bn to the national debt pile by June 2022.

The analysis found that, even in this scenario, an expected economic recovery starting in the first half of next year would be enough to secure Australia’s vaunted top credit score by ensuring the budget position would not deteriorate significantly through 2022-23 – a key medium-term horizon for the ratings agency.

Mr Walker said the analysis was completed at the start of August – before the extension of the Greater Sydney outbreak and prior to Victoria’s.

Nevertheless, he said the message behind the modelling remained essentially unchanged: the country’s AAA looked secure, as long as lockdowns end this year.

“The vaccine strategy and opening up of the economy is the key assumption, and we are expecting that to happen from around November,” Mr Walker said. “Seeing a return to somewhat normal life, where there aren’t rolling lockdowns, economies are open and we start living with Covid – that will be the key to the recoveries for all governments (state and Commonwealth) in Australia.”

The Queensland and West Australian premiers in recent days have indicated they remain committed to elimination strategies, whatever the vaccination rate. But Mr Walker warned that not committing to the national transition plan would put states’ credit ratings at risk.

“The question becomes: if they don’t open up at 80 per cent, when do they open up? How much longer can these states keep locking down, and what’s the economic and fiscal cost?”

“It has not been politically acceptable to have any Covid deaths, but once we open up we know from the experience overseas that cases will rise and deaths will occur,” Mr Walker said.

“If you have a government focused on health outcomes above all else, you can see these lockdowns going on for the conceivable future. That will likely have an impact on the ratings as the economic and fiscal toll mounts.”

Mr Walker said that the 40 per cent collapse in the iron ore price since May to about $US140 a tonne had yet to drag on the Commonwealth’s budget outlook, as S&P had assumed a $US100 a tonne iron ore price in its budget forecasts, almost double Treasury’s $US55 a tonne assumption,

S&P’s new report simulated the impact of two further outbreaks at the end of 2021 and early 2022 and found that the country’s debt and net interest payments as a proportion of GDP and revenue, respectively, would rise, but only marginally and not sufficiently to threaten our top credit rating.

Under the modelling, an outbreak in each of the next two quarters would lift the Commonwealth and state net debt to GDP position from 34.2 per cent under a base case, to 35.5 per cent by June 2022 – an increase of $30bn, but well under the 60 per cent threshold for S&P to assign a lower debt assessment within the AAA rating.

The cost of servicing debt as a share of total combined revenue increases only marginally accounting for the two further outbreaks: from 3.9 per cent to 4.1 per cent.

Mr Walker said he also assumed no major new Commonwealth fiscal support packages.