Fitch Downgrades Australia’s Rating Outlook

Fitch Ratings downgraded Australia’s rating outlook citing the impact the global coronavirus, or Covid-19, pandemic on the economy and public finances.

The rating agency affirmed Australia’s sovereign ratings at ‘AAA’ but lowered the outlook to ‘negative’ from ‘stable’.

Fitch said “Growth will fall sharply in 2020 and government spending in response to the health and economic crisis will cause large fiscal deficits and a sharp increase in government debt/GDP.”

GDP is forecast to fall 5 percent this year due to the coronavirus containment measures. Although these measures contained the spread of the virus, they also weighed on household spending, business sentiment and investment.

A gradual recovery is expected to begin in the second half of the year and GDP is seen expanding 4.8 percent next year.

The agency noted that exports would be affected if China’s recovery were to falter.

The government has unveiled three fiscal packages recently to cushion the impact of the coronavirus shock. The general government deficit is forecast to rise to 6.9 percent of GDP in the fiscal year ending June 2020 and to 9.0 percent in FY21 from 1.2 percent in FY19.

Fitch forecasts Australia’s gross general government debt to jump to 58.2 percent of GDP by FYE21 from 41.9 percent at FYE19 on the back of the wider fiscal deficit.

Nonetheless, the ‘AAA’ rating reflects Australia’s strong institutions and effective macroeconomic policy framework, which has supported a long record of stable economic growth prior to the current exogenous shock.

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Fitch downgrades Australia’s banks

The economic crisis sparked by coronavirus has prompted Fitch Ratings to cut its credit rating for the major Australian banks, as it warned of rising bad debts and pressure on profits from low interest rates.

Fitch has downgraded the big four banks.Credit:Karl Hilzinger

The global credit ratings agency on Tuesday night downgraded the big four banks to A+, with a "negative" outlook, as it predicted that government policies would not fully cushion the economy from the hit of the virus.

Banks have in recent weeks said small businesses and households can defer their loan repayments for up to six months if needed, but Fitch predicted this would not stop some loans from going into default.

It said that once the economic recovery begins, "a portion of businesses will fail to restart," and "some households will not be able to resume debt repayments after the repayment holidays provided by the banks."

"As a result, asset-quality metrics will likely weaken from current levels over the next 12-18 months," Fitch said.

The plunge in official interest rates was another risk identified by Fitch. Falling rates crunch banks' net interest margins, which refer to the difference between banks' funding costs and what they charge for loans.

"Earnings will face pressure from both higher impairment charges and lower interest rates. The central banks in Australia and New Zealand have cut their respective cash rates to 0.25 per cent and indicated that they will remain there for a prolonged period," Fitch said.

Credit ratings can influence banks' wholesale borrowing costs, which can in turn affect the price of loans.

Rival credit ratings agency Standard & Poor's has made no changes to its big four bank ratings, which are all AA- with a "stable" outlook.

Moody's, the other major ratings house, cut its outlook for the major banks to "negative" last week, citing similar factors to Fitch, but it has not changed its rating from Aa3.

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