Fitch Rtgs: Australia’s State Govt Debts a Relevant Sovereign Rating Driver

(The following statement was released by the rating agency) Fitch Ratings-Hong Kong/Sydney-16 December 2020: Rising debt among Australia's state governments will be factored into Fitch Ratings' assessments of the country's sovereign rating as it emerges from the coronavirus pandemic shock. Australia came into the coronavirus shock with rating headroom, in our view, to deploy large fiscal stimulus to counter the near-term effects of the crisis. We affirmed the ‘AAA' rating in May, but revised the Outlook to Negative to reflect the uncertain impact of the pandemic shock on the economy and public finances. We emphasised that the medium-term debt trajectory would be a key factor in our future assessments of the rating, given the rise in public debt stemming from recent stimulus measures. Federal government finances remain the main driver of fiscal trends for our measure of the general government (GG) deficit and debt metrics. However, these metrics also encompass state finances. States set and operate under their own policies of fiscal management, and their debt will jump sharply amid efforts to address the pandemic's impact. If GG debt remains on an upward trend as a result of dynamics at the state level, this could add to downward pressure on Australia's sovereign rating. State budgets for the current fiscal year ending June 2021 (FY21) show a considerable widening in fiscal deficits and an increase in debt/GDP ratios as a result of the economic shock and fiscal stimulus efforts at the state level. According to state government projections, combined deficits at the state level will reach just over 4% of national GDP, driven primarily by deficits in the largest states, Victoria and New South Wales (neither of which are rated by Fitch). As the economy recovers, states plan gradual fiscal consolidation beginning in FY22, when the aggregate deficit is projected to fall to 3%, based on individual states' budget plans. However, these deficits are forecast to remain above pre-pandemic levels through to FY24, when the aggregate will reach 1.5%. As such, state government debt would increase from about 8% of national GDP in FY19 to around 22% by FY24. Fitch believes that fiscal deficit results will be narrower than those projected in recent state and federal budgets, supported by our expectation of a stronger economic recovery and elevated iron ore prices. We have just revised our GDP growth forecast for 2020 to -2.8%, from a previous -3.7%, and expect the economy to grow by 3.8% in 2021. Nevertheless, the pandemic shock will weigh on public finances in the near term. State and federal authorities have brought forward large capital spending programmes to support jobs growth. This will result in elevated borrowing in the period to FY24, although spending could slow in later years if job growth exceeds official expectations. We expect states' ability to stabilise debt and introduce timely fiscal consolidation to vary, depending on their respective fiscal strategies. Fiscal repair will be dependent on suppression of the virus and continued economic growth both at the national and state levels. We forecast a fiscal deficit of 8.9% of GDP at the commonwealth government level and roughly 3.8% at the state level, resulting a consolidated general government deficit of 12.7% in FY21, compared with an estimated 7.1% in the previous year. In FY22 we forecast an aggregate state deficit of about 2.2% of national GDP with an overall GG deficit of 6% of GDP. Under our baseline forecasts, this increases GG debt to about 64% of GDP by FYE22, up from about 42% in FY19. State and local debt will account for about 10pp of the 23pp increase in gross debt. We expect debt ratios to begin stabilising beyond FY23, with GG debt just above 65% of GDP. Contact: Jeremy Zook Director, Sovereigns +852 2263 9944 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Paul Norris Director, International Public Finance +61 2 8256 0326 Stephen Schwartz Senior Director, Sovereigns +852 2263 9938 Duncan Innes-Ker Senior Director, Fitch Wire +852 2263 9993 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 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) 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. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.