Treasurer Tim Pallas insists the loss of Victoria’s AAA credit rating is “eminently manageable”, forecasting it to cost the state an extra $10 million each year.
Ratings agency S&P downgraded the state’s credit rating by two notches from AAA to AA on Monday, citing a weaker fiscal outlook.
“The lowered rating reflects our view that the COVID-19 pandemic has dealt Victoria a severe economic and fiscal shock that has materially weakened its credit metrics more than domestic and international ‘AAA’ and ‘AA+’ rated governments,” S&P said.
The agency said the Victorian economy had been affected more than any other state or territory due to its second wave of COVID-19 and subsequent 112-day lockdown.
It also pointed to the state’s 2020/21 budget, which forecasts debt will soar to $154.8 billion by 2023/4 – about 28.9 per cent of the size of Victoria’s gross state product.
“In our view, the Victorian government’s path to fiscal repair will be more challenging and prolonged than other states because of the significant increase in debt stock projected over the next few years and the state’s more limited flexibility to repair its balance sheet through asset sales and some degree of uncertainty about the government’s policy position with respect to expense management,” S&P said.
S&P had put Victoria’s AAA rating on a negative credit watch amid the second wave in August and had warned there was a “one-in-two likelihood” it would lower the state’s rating.
It made the same warning after Mr Pallas handed down the budget in November.
The state has now been removed from credit watch, with S&P maintaining its outlook is now stable.
Mr Pallas expects the lower rating to increase borrowing payments by about $10 million a year, a figure he labelled “eminently manageable”.
“Whether we keep a AAA credit rating is not the main game here,” the treasurer told reporters on Monday.
“The main game was to be able to assure the Victorian people that we were going to be standing with them and Victorian businesses through these difficult times.”
Opposition Leader Michael O’Brien said the downgrade would mean higher interest rate charges, leaving less money to build schools and hospitals.
“This is the price we pay for Labor’s economic mismanagement,” he said.
“This Labor government created the second wave. They’ve blown the budget and now they’re blown our AAA.
“This is taking us back to the bad old days of Cain and Kirner. Victorians deserve better than that.”
But Mr Pallas said the Victorian Liberal Leader was “out of step” with the big-spending approach endorsed by federal Treasurer Josh Frydenberg and Reserve Bank Governor Philip Lowe.
“It’s not a new or radical strategy,” he said.
“It’s one that’s worked the world over through hard times in the past, and these are not historically high levels of debt for the state of Victoria.
“We’ve been under considerably higher burdens under Bolte, under Hamer and, of course, in the Cain, Kirner and Kennett eras.”
Mr Pallas said there was no set timeline for Victoria to reclaim its AAA rating from S&P, noting fellow international ratings agency Moodys is yet to revoke the state’s status.
Australian Associated Press