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Victoria in ‘dire’ state, AAA rating at risk

Credit ratings agencies say ­Victoria’s public finances are ‘dire’, with one warning the country’s second-largest state could be stripped of its AAA ­rating within weeks.

Victorian Premier Daniel Andrews faces the first downgrade of an Australian government in seven years. Picture: Chris Hopkins
Victorian Premier Daniel Andrews faces the first downgrade of an Australian government in seven years. Picture: Chris Hopkins

Credit ratings agencies say ­Victoria’s public finances are “dire”, with one warning the country’s second-largest state could be stripped of its AAA ­rating within weeks — the first downgrade of an Australian government in seven years.

S&P Global Ratings, which said in August that Victoria had a 50 per cent chance of a downgrade, is now more concerned about the state’s finances and “likely the largest ever” deficit of any AAA-rated government in the world.

Any downgrade would leave NSW, the ACT and the commonwealth as the only AAA-rated governments in the country.

“Victoria is increasing borrowing substantially more than what we are seeing in NSW relative to its balance sheet,” Anthony Walker, S&P’s top sovereign analyst for Australia, said. “It’s been more aggressive in its borrowing and spending”.

The agency was in May expecting Victoria to post a deficit this financial year of about 20 per cent of revenue. “Early indications are Victoria’s 2021 deficit will be more than 50 per cent of its revenue, likely the largest ever deficit seen for a AAA-rated (state) government,” Mr Walker said. “What we have seen is pretty dire compared to our expectations.”

State and provincial governments in Canada and Germany — which have suffered more from the pandemic — have been forecasting deficits of between 10 and 20 per cent, he said.

Victoria’s budget forecasts a surge in net debt from $44bn in June 2020 to $155bn by 2024, compared to an expected increase to $104bn 2024 for NSW.

Mr Walker’s warning comes as new data shows the economic recovery is accelerating. Australian Taxation Office figures show there are 1.5 million people on the JobKeeper payment, 700,000 fewer than forecast by federal government budget assumptions. The data shows there were about two million fewer employees qualified for JobKeeper in October than in September.

Queensland Treasurer Cameron Dick — who will hand down the state’s budget on Tuesday, the last state to do so — said his state’s debt would be lower than NSW and Victoria. “I don’t want to borrow any more,” he said. “And I’ve made that clear, but at the ­moment, borrowing is the only thing we can do to ensure we continue to strengthen the Queensland economy.”

Mr Walker hinted that AAA-rated NSW, which was placed on “negative outlook” in August, would be spared a downgrade.

“The NSW deficit is difficult to tell at the moment,” he said. “It could be 30-35 per cent, which is still very large; however, the timing of asset sales could reduce this level of deficit. Large assets sales are a luxury Victoria doesn’t have.”

The comments also come ahead of the national accounts for the third quarter to be released on Wednesday, expected to show the economy grew over the three months to September 30 and thereby bringing the recession — defined as two consecutive quarters of contraction — to an end.

Shane Oliver, AMP Capital chief economist, said he expected the national economy grew 2 per cent over the quarter. “Were it not for Victoria’s lockdown the rebound would probably have been around 4 to 5 per cent,” he said. “Even with a 2 per cent rebound GDP will still be down 4.8 per cent on a year ago.”

Moody’s analyst John Manning said Victoria’s second lockdown “cost it an extra $21bn in borrowings”. “It’s in a significantly weaker position than NSW,” he said. Mr Walker said the prospect of another lockdown in Victoria, which until the pandemic had the highest population growth rate in the nation, would undermine the state’s appeal to business and potential immigrants. “For Victoria we have some concerns about its economic viability, because we question whether migrants will want to move there as readily as before,” he said. “If there is another outbreak we think it’s more likely they would react like South Australia rather than NSW, which is living with the pandemic.”

S&P put SA, which has forecast an increase in net debt from $10.5bn to $24.5bn by 2024, on “negative outlook” on Friday. “We could lower our ratings on South Australia over the next 24 months if its fiscal metrics do not recover to the degree we forecast,” it said.

Victoria was downgraded to AA in 1989 during the Cain government, ahead of being upgraded to AA+ in 1999 and AAA in 2003. Queensland, SA and Western Australia lost their AAA ratings in 2009, 2012, and 2013 respectively. S&P put the federal government on “negative outlook” in May.

“Across country we’re seeing infrastructure spending roughly 25 per cent up on last year, which was up 20 per cent on the year before that. The spending will be about double the 2015 level this year,” Mr Walker said.

Read related topics:Coronavirus
Adam Creighton
Adam CreightonWashington Correspondent

Adam Creighton is an award-winning journalist with a special interest in tax and financial policy. He was a Journalist in Residence at the University of Chicago’s Booth School of Business in 2019. He’s written for The Economist and The Wall Street Journal from London and Washington DC, and authored book chapters on superannuation for Oxford University Press. He started his career at the Reserve Bank of Australia and the Australian Prudential Regulation Authority. He holds a Bachelor of Economics with First Class Honours from the University of New South Wales, and Master of Philosophy in Economics from Balliol College, Oxford, where he was a Commonwealth Scholar.

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Original URL: https://www.theaustralian.com.au/nation/victoria-in-dire-state-aaa-rating-at-risk/news-story/2ed9c1e1775e2c9bc779c3cb59c55d7d