Moody’s affirms Australia’s AAA debt rating despite recession

Moody’s has reconfirmed Australia’s AAA debt rating despite the country suffering through its first recession in nearly 30 years.

The Reserve Bank of Australia in Sydney. Moody’s backed the country’s economic and institutions and governance strengths

Moody’s has reconfirmed Aust­ralia’s AAA credit rating despite the country suffering through its first recession in nearly 30 years, with ballooning debt and deficits as a result of the COVID-19 crisis.

In a report issued on Tuesday, the global ratings agency said “the rating affirmation and stable outlook reflect Moody‘s expectation that Australia’s (economy) and institutions­ and governance strengths will continue to support the sovereign’s resilience in the face of shocks, including the current­ coronavirus pandemic”.

Josh Frydenberg said the fact that Australia had maintained its top rating was “an expression of confidence in the Morrison government’s handling of the coronavirus crisis”. “We are not through this crisis yet but with restrictions starting to ease, there are encouraging signs across the economy,” the Treas­urer said.

Australia is in an elite club of only 10 countries rated AAA by all three global ratings agencies, althoug­h in early April Standard & Poor’s downgraded its rating outlook to “negative” to factor in the economic toll of the health crisis and the cost of the emergency fisca­l stimulus measures.

The Parliamentary Budget Office­ forecasts the federal budget deficit will blow out to $67bn this financial year, and to $191bn in the next, before contracting to a $56bn deficit in 2022-23.

Moody’s analysts noted the “significant widening in the fiscal deficits and increase in the government‘s debt burden”, but said that a “longstanding consensus on prudent­ management of public finance­s will continue to prevail and, as the economy recovers, the sovereign’s fiscal strength will remain­ broadly resilient”.

Mr Frydenberg said the AAA reaffirmation was “a reminder of the importance of main­taining our commitment to medium-term fiscal sustainability”.

“Our measures are temporary, targeted and proportionate to the challenge we face and will ensure Australia bounces back stronger on the other side, without undermining the structural integrity of the budget which Australians have worked so hard to restore.”

Australia’s government debt burden will rise to 50 per cent of GDP by mid next year, from 42 per cent in June last year, with “further modest increases in the following years”, Moody’s predicts.

“While such a debt burden would be Australia’s highest in several decades, it would also remain consistent with other AAA-rated sovereigns, most of which are facing a similar sudden debt shock,” the report said.

“Compared to other advanced economies, the initial jump in the debt burden is likely to be less large for Australia due to a somewhat less acute fall in growth.”

Moody’s expects Australian real GDP will drop by about 5 per cent this year, a “large” fall that is nonetheless smaller than the average 6.4 per cent contraction across advanced economies.

Importantly, Moody’s said the “resilience” of the economy “supports a return to positive growth next year, without any significant long-lasting impact on growth potent­ial once the crisis passes”.

Moody’s economists forecast the economy will rebound by 3.7 per cent next year, although unemployment is expected to stay elevated, only falling from 8.5 per cent at the end of this year to 7 per cent a year later.

Evidence of policymaking in­stit­ution­s becoming less effecti­ve could lead to a future downgrade, as would “a sustained and marked deterioration in fiscal and debt metrics not compensated for during periods of robust … growth”.