The credit rating downgrade of the nation’s two largest states has put the spotlight on Australia’s national AAA rating.
But Treasurer Josh Frydenberg is quick to point out that Standard & Poor’s only reaffirmed the Commonwealth’s AAA rating on October 20, shortly after he handed down his delayed 2020/21 federal budget.
On Monday, S&P, the global credit rating agency, downgraded the long-term ratings of NSW and Victoria – both losing their AAA status as casualties of the pandemic.
NSW was lowered to AA-plus on the state’s rising debt burden, while Victoria was cut two notches to AA after being dealt a “severe economic and fiscal shock”.
Mr Frydenberg also notes S&P said the action on Victoria and NSW “has no direct or immediate effect on the Sovereign rating at this stage”.
The treasurer is expected to release the Mid-Year Economic and Fiscal Outlook next week.
“The Morrison government’s economic recovery plan will help to create jobs and rebuild the economy to secure Australia’s future,” Mr Frydenberg told AAP.
“(Its) unprecedented economic support has helped to keep businesses in business and Australians in jobs throughout COVID-19.”
However Australia’s rating does carry a negative outlook and S&P has warned the rating could be lowered within the next two years if the pandemic causes economic and fiscal damage that is more prolonged than currently expected.
Australia is one of just nine countries to have a AAA rating from all three main agencies, which includes S&P, Moody’s Investors Service and Fitch Ratings.
A lower rating does potentially raise the cost of borrowing for a country, state or entity.
ANZ economists said the downgrading of NSW and Victoria was on the back of a weaker fiscal outlook and while the latter was expected, the double-notch reduction was a surprise.
“Though the fiscal outlook is challenging, we think based off how quickly economic activity has been recovering there is room for upside fiscal surprises over the next year,” they said in a note to clients.
It is unlikely Reserve Bank governor Philip Lowe lost any sleep over the downgrades.
Addressing federal politicians last week, Dr Lowe was quizzed on the potential cut to Victoria’s AAA rating.
“A downgrade of credit ratings doesn’t concern me,” Dr Lowe replied.
“The AAA credit rating has more political symbolism than economic importance.”
He said it is important that there be fiscal discipline and a credible medium-term plan.
“What is of more concern is that people don’t have jobs,” he said.
“To borrow now, to make sure that the economy is recovering strongly and that people have jobs, I think is entirely sensible.”