Victorian budget sparks warnings from ratings agencies

Victoria could take ‘many more years than its peers’ to recover from the Covid pandemic, and faces a debt mountain.

The deserted Bourke Street Mall during Melbourne's lockdown. Picture: NCA NewsWire / Andrew Henshaw

Ratings agency S&P has warned Victoria could take “many more years than its peers” to recover from the coronavirus pandemic, while Moody’s has warned that the five-month lockdown sparked by the state’s second wave of coronavirus has “weakened its capacity to pursue timely fiscal repair”, following the tabling of the state budget on Tuesday.

“The budget presented by the state of Victoria highlights the substantial economic and fiscal damage caused to state finances by the COVID-19 outbreak and containment measures,” S&P said.

“Victoria has controlled the second-wave outbreak, and the relaxation of restrictions will support a resumption of economic activity, but the state has been hit by the largest economic shock in its post-war history.

“While debt servicing should remain manageable due to low interest rates, we project debt levels to rise well beyond our previous expectations as the government rolls out significant stimulatory measures such as material new infrastructure spending.

“This may mean Victoria’s fiscal and economic shock could take many more years than its peers to recover.”

S&P moved to place Victoria on a “CreditWatch” rating at the height of the second wave of the pandemic on August 5, pending greater clarity about the fiscal effect of the lockdown, the government’s policy direction, and the government’s ability to control the outbreak.

On Tuesday, the agency said it still believed there was a “one-in-two likelihood” that it would lower Victoria’s rating.

“This could occur if we consider the state’s fiscal repair would be delayed beyond our current expectations or if our view is that the state’s financial management has weakened,” S&P said.

“S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic.

“Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunisation, which could come by the middle of next year. As the situation evolves, we will update our assumptions and estimates accordingly.”

Moody’s Investors Service vice president John Manning said Victoria’s second lockdown had “severely eroded” the state’s FY2021 budgetary position, “and weakened its capacity to pursue timely fiscal repair.”

“Despite its large and diverse economy, the state projects operating deficits across the four years to FY2024 which, combined with extensive capital spending, will see general government borrowings almost triple to $173.4 billion by FY2024 from $62.8 billion in FY2020,” Mr Manning said.

“We estimate the state’s borrowing requirements in FY2021 alone have risen by $20-25 billion as a result of the second lockdown.

“While record-low interest rates will enable the state to absorb such a sharp rise in debt, borrowings will remain elevated for an extended period of time and significantly constrain Victoria’s operating profile over time.

“In turn, this will test institutional capacity as the state targets fiscal repair over an extended period of time.”