(The following statement was released by the rating agency) Fitch Ratings-Sydney-06 July 2020: The reopening of Australia's economy, as social distancing measures are eased, does not have a uniform impact across corporate and infrastructure ratings, says Fitch Ratings. While the economy appears to be on a path to recovery, activity in some sectors is likely to remain subdued, and the impact on ratings is likely to be driven by the government's stimulus package. Given the circumstances, Fitch believes there is an increasing likelihood of the federal government providing further, more targeted stimulus to affected sectors beyond end-September, when measures in place are due to end. Without these stimulus measures, the economy and credit profiles of our rated issuers would be severely impacted.
The Australian economy is now re-opening under a national framework set out by the National Cabinet, with removal of restrictions is occurring on a state-by-state basis. The re-openings have already benefited businesses throughout the nation, and we expect the removal of further restrictions to continue to support businesses and the economy. Fitch recently revised Australia's 2020 GDP forecast to a contraction of 2.7% from a fall of 5.0% previously, reflecting better-than-expected economic data and relative successes in virus containment. However, we do not expect a smooth recovery as some restrictions will remain, and local governments may re-impose more severe restrictions to address localised outbreaks, as we have seen following an outbreak in Melbourne in recent days.
Fitch believes that activity in some sectors is likely to remain subdued and that the government will provide further stimulus to these affected sectors. In particular, we believe that sectors with exposure to infrastructure - such as homebuilders and construction and engineering companies, like Fitch-rated issuers Lendlease Corporation Limited (BBB-/Stable) and Mirvac Limited (A-/Stable) - will receive the most benefit from further fiscal stimulus. To date, the federal government has announced grants of AUD25,000 to entice new-home builds or substantial renovations. It also brought forward a further AUD1.5 billion in planned infrastructure spending, adding to the AUD7.8 billion announced in November 2019. Industry superannuation funds also announced they will invest around AUD20 billion in infrastructure and property over the next three years to aid the recovery.
The tourism sector was one of the hardest hit following the lockdowns due to the restrictions on movement and closure of both state and national borders. Virgin Australia Holdings Limited (D) and Qantas Airways Limited (not rated) received limited support from the Australian government in the form of rebates and subsidies. Direct financial assistance was only given to regional airlines, including Regional Express Holdings Limited (Rex, not rated), under the AUD100 million COVID-19 Regional Airlines Funding Assistance programme. We expect demand for domestic travel to increase in the short to medium term, which will benefit VAH and Qantas - although Rex is reportedly looking to expand its network to include the Golden Triangle of Sydney, Melbourne and Brisbane, which would see an increase in competition in the sector. Nevertheless, the improving demand is likely to be aided by local governments helping to promote tourism within Australia, which will help the sector offset losses from international tourism, which is unlikely to resume until at least 2021. However, we do not expect domestic airline capacity to return to pre-pandemic levels until at least the end of 2021.
Fitch also believes that the lockdowns have accelerated or will drive structural changes in certain sectors, and that these changes may have future rating impacts. We believe the most immediate of these is in the retail sector, with the growth in online retailing during the pandemic continuing and leading to a permanent reduction in retail spending in traditional brick-and-mortar stores. While we expect this to have a larger impact on lower grade mall operators, Fitch revised Scentre Group Limited's (A/Negative) Outlook to Negative to reflect its exposure to this change. We also expect some structural shifts in demand for commercial property as businesses move to more flexible working arrangements, although we believe that this structural shift will likely take more time due to the longer-term nature of commercial leasing contracts. In other sectors affected by the restrictions and lower economic activity, such as gaming, business services, mining and mining services, steelmaking, energy and utilities, we expect companies to continue to focus on cost-cutting and delaying capex to manage their liquidity and shore up their balance sheets while demand recovers. We also believe that transportation infrastructure assets will recover in line with the economic recovery, with toll roads and ports likely to recover faster than airports.
The report "What Investors Want to Know: Reopening Plans in Australia" discusses what the reopening means for ratings and the impact that it will have on a sector-by-sector basis across non-financial corporate and infrastructure issuers. It can be found at www.fitchratings.com or by clicking the link above. Contact: Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 James Hollamby Associate Director +61 2 8256 0347 Leo Park Associate Director +61 2 8256 0323 James Hodges Associate Director +61 2 8256 0377 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435.
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