SYDNEY (Reuters) – Global ratings agency S&P on Wednesday lowered its outlook on Australia’s coveted ‘AAA’ rating to “negative” from “stable” in anticipation of a “material” weakening in the government’s debt position as it splashes out a large fiscal stimulus package.
S&P said Australia’s pristine rating could be downgraded within the next two years if the economic damage from the COVID-19 outbreak is more severe or prolonged than it currently expects.
The pandemic has dealt Australia a severe economic and fiscal shock, with S&P predicting the A$2 trillion ($1.23 trillion) economy would plunge into recession for the first time in nearly 30 years.
This would cause a “a substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level,” S&P said in a statement.
The Australian government has pledged A$320 billion ($197.73 billion) in fiscal spending to backstop the economy and prevent a crisis as the pandemic shuts companies and leaves many unemployed.
The staggering size of the fiscal package means Australia might have to borrow more than A$300 billion over the next 15 months – 15% of annual economic output (GDP).
In a note last week after the government announced the third tranche of its fiscal stimulus package, AMP chief economist Shane Oliver noted that Australia’s public finances remained better than most other nations.
“I would rather a rating downgrade than a deep depression/recession any day…particularly when any downgrade will have no impact on the Federal Governments’ cost of borrowing,” Oliver said.
It was only in September 2018 that S&P upgraded Australia’s outlook to “stable” from “negative” as the budget came close to balance. The government had even projected a surplus for the current fiscal year and next.
While all those predictions are now under water, Australia’s public debt is still in good shape, S&P noted.
“While fiscal stimulus measures will soften the blow presented by the COVID-19 outbreak and weigh heavily on public finances in the immediate future, they won’t structurally weaken Australia’s fiscal position,” S&P said.
“This expected improvement is a key supporting factor of our ‘AAA’ rating.”
($1 = 1.6297 Australian dollars)
(Reporting by Swati Pandey; Editing by Shri Navaratnam)
