NSW’s AAA Credit Rating Downgraded But Fiscal Strength Deemed Positive

December 8, 2020 Updated: December 8, 2020

Australian’s largest state in the economy, New South Wales, has lost its AAA credit rating for the first time in 17 years amid concerns over a sharp spike in debt in the coming years.

It came just one week after Moody’s reaffirmed the state’s AAA rating, and days after Victoria was downgraded as well.

S&P downgraded NSW’s long-term credit rating by one notch to AA+ on Dec. 7, citing rising debt burden, revenue writedowns, unprecedented infrastructure, and fiscal stimulus spending as factors playing into its revision. It, however, maintains its short-term rating at A-1+.

“The downgrade primarily reflects our expectation that NSW’s debt burden will rise substantially during the next three years,” S&P stated in its report.

The agency forecasted that the state’s debt serviced by taxation will rise to 149 percent of operating revenues by July 2023, up 71 percent over four years. Yet S&P acknowledged its flexibility in recouping some revenue via privatisation.

“NSW has a higher degree of flexibility than its peers, with some potential upside to our deficit and debt projections from unbudgeted asset sales and expenditure reviews,” S&P stated.

S&P also remained positive about NSW’s economic prospects and financial strength.

“Our ratings on NSW are supported by its wealthy and diversified economy, which is recuperating from a recession in the first half of 2020; excellent financial management; and exceptional liquidity,” it said. “NSW was quick to control the spread of coronavirus, averting what could have been a deeper recession. It is well-placed to return to operating surplus and stabilise the balance sheet impact in the medium term.”

The state’s budget, released in early Nov., reflects the profound impact of the pandemic. As a result of $29 billion in pandemic stimulus spending and a forecasted $25 billion drop in revenue over the next five years, the deficit is expected to hit a record high at $16 billion in 2020-21 and debt will sore to $104 billion by July 2024.

NSW Treasurer Dominic Perrottet downplayed the impact of the downgrade, saying he hoped the recent state budget would eventually help return NSW to a AAA rating.

“Our economic response has been about creating as many jobs as possible, supporting businesses through this time and maintaining record level of investment in infrastructure,” he said on Dec. 7. “The rating agencies noted NSW’s history of sound financial management, our willingness to tackle COVID-19 head-on when it mattered, and a strong commitment to return the balance sheet to a sustainable footing.”

The latest ABS data released on Dec. 4 showed that the NSW economy has regained growth momentum in the September quarter, with the state final demand surging by 6.8 percent. Over 36,000 jobs were added in October, bringing the unemployment rate down to 6.5 percent, the lowest among the states.

But NSW shadow treasurer Walt Secord said the downgrading was “devastating” and augured poorly for the state’s economy.

“NSW unemployment is still (at) 6.5 percent and at least 281,700 people are unemployed … NSW used to be the engine room of the Australian economy and now we lag behind the other states,” he said.

RBA Governor Not Concerned

S&P also downgraded the nation’s second-largest economy, Victoria, by two notches to AA, which was estimated by the opposition leader Michael O’Brien to result in an extra interest payment around $155 million.

However, RBA governor Philip Lowe made it clear recently that a downgrade in the rating was not of economic concern, and what mattered was “disciplined fiscal policy and a credible medium-term plan.”

When asked about his view on the prospects of Victoria losing its AAA rating at the Dec. 2 at a parliamentary committee hearing, Lowe endorsed the decision by states to incur record debt and deficit to create jobs and drive economic recovery.

“AAA credit ratings have more political symbolism than economic importance,” Lowe said. “What is of more concern is that people don’t have jobs.”

“To borrow now, to make sure that the economy is recovering strongly and that people have jobs, I think is entirely sensible,” he added. “Once we’re well down that road, then, rightly, return to fiscal discipline and getting debt levels down again.”

Federal Treasurer Josh Frydenberg also weighed in on S&P Global’s latest decision and defended the federal government’s unprecedented stimulus schemes.

“The Morrison Government’s unprecedented economic support has helped to keep businesses in business and Australians in jobs throughout COVID-19,” he told The Epoch Times in a statement on Dec. 7.

“Standard and Poors (S&P) reaffirmed the Commonwealth’s AAA rating on 20 October 2020 and said today’s actions on Victoria and NSW has no direct or immediate effect on the Sovereign rating at this stage. ‘” he said.