S&P said Australian debt levels would remain elevated “for a number of years”.
“The COVID-19 outbreak has dealt Australia a severe economic and fiscal shock,” it said.
“We expect the Australian economy to plunge into recession for the first time in almost 30 years, causing a substantial deterioration of the government’s fiscal headroom at the ‘AA rating level.”
The agency also put NSW, Victoria and the ACT, which all have triple A ratings, on negative outlook. S&P has long argued a state cannot have a rating higher than the federal government given how much they depend on federal revenues such as the GST, which are expected to decline as the economy slows.
Negative outlook means the agency believes there is a one-in-three chance of Australia’s credit rating being downgraded. A downgrade would put upward pressure on interest rates on Australian debt.
S&P said while the government’s spending measures would soften the economic blows caused by the virus, there would also be a heavy hit to revenues as personal and company tax collections dried up.
“We believe there could be more fiscal stimulus packages to come and that economic conditions could further deteriorate, pushing the expected recovery beyond our current expectation of late 2020,” it said.
Treasurer Josh Frydenberg revealed six million payments worth $4.5 billion had been made to people under the government’s first, $17.6 billion, stimulus measure that was announced in mid-March.
S&P’s move is at odds with fellow rating agency Moody’s which earlier this week stood by its own triple A rating for Australia.
While agreeing Australia’s budget position was deteriorating, it argued the government’s stimulus measure would help protect the economy.
“The Australian stimulus package to combat the growing economic impact of the coronavirus outbreak is unlikely to generate significant downward pressure on its sovereign’s credit profile because the government has effectively reduced fiscal deficits alongside strong levels of economic growth over the last decade,” agency vice president Martin Petch said.
The size of the budget shortfall facing the government has swelled with its JobKeeper program, which is forecast to cost $40 billion by June and another $90 billion in 2020-21.
ANZ senior economist Cherelle Murphy said government was now facing a budget deficit of around 10 per cent of GDP next financial year or almost $200 billion. It would be the largest budget deficit since the end of World War II.
Ms Murphy said net debt, currently 19 per cent of GDP, was likely to swell to 30 per cent with the government owing a record $850 billion in gross terms.
“More government spending is likely in the coming weeks, as the government continues to try to
cushion the economic fallout of the pandemic. In the near term, we do not rule out further fiscal measures to prop up households or small and medium enterprises,” she said.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.