Ratings Downgrades as New Banking Licences Suspended
(8 April 2020 – Australia) Expectations of a ‘significant economic shock’ in H1 2020 have led to Fitch and S&P downgrading Australia’s largest banks. S&P Global has also unsurprisingly placed Australia’s AAA sovereign credit rating on negative outlook as a ‘substantial deterioration’ in the country’s financial position unfolds ahead of a growing risk of a deep recession.
The Australian Prudential Regulatory Authority (APRA) has also confirmed it is temporarily suspending the issuance of new licenses in response to the economic uncertainty created by COVID-19. According to a ‘Scenario and Sensitivity’ analysis from S&P Global Ratings, credit losses across Australia’s banks are set to “more than triple” in the 2020 calendar year in response to the economic fallout from the COVID-10 pandemic.
Fitch claimed the decision reflects business closures and social distancing directives from government authorities designed to curb the spread of COVID-19. The agency claimed that as a result of such measures, it expects both Australia and New Zealand’s GDP to ‘shrink’ in H1 2020, with only a ‘modest recovery’ in H2 2020 and into H1 2021. Australia still has the top rating from the world’s three major agencies – S&P, Moody’s and Fitch. Australia is the first of eleven nations rated AAA by S&P that have been put on a negative outlook since the coronavirus outbreak. It remains to be seen if Singapore, Switzerland, the Netherlands, Germany, the US or Canada will also be placed on a negative outlook given similar stimulus packages are being deployed at a cost of trillions of dollars.
“Australia has strong institutions, credible monetary policy and a floating exchange rate which all helped support the country’s triple-A rating. 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 ‘AAA’ rating level. Net government debt and relative interest cost nevertheless are likely to remain at elevated levels for a number of years” S&P noted in its statement.
“A very large economic contraction is, however, expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years. That will be emphasised in the first of two Financial Stability Reviews for 2020 from the RBA” stated Reserve Bank of Australia (RBA) Governor, Philip Lowe.
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