Coronavirus: Victoria faces costly credit rating cut

State government debt across the country is surging, putting pressure on the states’ hard-fought AAA and AA+ credit ratings.

Victorian Treasurer Tim Pallas. Picture: David Crosling

Victoria could have its credit rating slashed within weeks and other states are at growing risk of following suit, as states splurge on debt to counter the economic ­effects of the coronavirus.

Ratings agency S&P Global on Wednesday warned that state government debt across the country was surging, putting pressure on the states’ hard-won and highly valued AAA and AA+ ratings.

Any cut to those credit ratings would likely increase the cost of servicing their debts, just as they start to balloon as a result of ­government initiatives aimed at stimulating their economies.

S&P placed Victoria’s rating on “credit watch negative” at the start of August, flagging that it would make a call on whether to cut the rating within a few months.

While the steady fall in new coronavirus cases in Victoria in recent weeks may have given Treasurer Tim Pallas some hope that the state could avoid a credit rating cut, S&P analyst Anthony Walker told The Australian the group still had deep concerns about the trajectory of the Victorian economy despite the recent progress with the virus.

He said “rapid” growth in Victoria’s public service wages bill in recent years, the pandemic’s ­potential long-term impact on the international and interstate migration that has been so central to Victoria’s economic growth, and the prospect of class actions against the state from companies that have suffered under Premier Daniel Andrews’s handling of the crisis could all weigh on the state, even if cases continue to fall.

Mr Walker also said the rise in spending by the Victorian government had been masked in recent years by strong population and revenue growth, both of which have since collapsed.

“COVID-19 has exposed some underlying weakness in the Victorian budget that we have been pointing out for nearly five years now,” Mr Walker said.

“Expense management has been very relaxed in Melbourne, a lot of new employees coming on, and a lot of wage outcomes.”

Victoria’s economic growth ­before the pandemic was driven heavily by international and interstate migration. And Mr Walker said Victoria’s relative outperformance on population growth could disappear once international borders reopen due to its handling of the pandemic.

“We do have some concerns that when international migration returns to Australia, are they going to be more hesitant about moving to Victoria because of its failure to protect its citizens compared to other states?”

A spokesman for the Victorian government said all jurisdictions were expected to increase their debt levels to support communities, jobs and the economy through the coronavirus.

“While no jurisdiction will be immune to the challenges the pandemic is creating, our management of the economy means we have the buffer needed to withstand the significant economic ­impacts of coronavirus,” he said.

“The Victorian government has responded to the crisis by ­investing nearly $13bn towards coronavirus measures that support Victorians through to the other side of the crisis.”

Every state — with the possible exception of Western Australia, which is receiving a big boost from soaring iron ore royalties — is set to record unusually high deficits this year, according to S&P’s analysis, which in turn will drive up their indebtedness.

But cheap global debt markets will limit the pain of a ratings cut, with borrowing costs currently at their lowest level in history.

The analysts said the growing risks around the credit ratings did not necessarily imply policy missteps, noting that the spending on measures such as infrastructure development would help alleviate some of the economic pain.