29 November 2021

ACT's AAA rating reaffirmed but infrastructure delays flagged

| Ian Bushnell
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Light rail

Infrastructure projects such as the next stage of light rail may face delays, says Standard and Poor’s. Photo: File.

The ACT Government’s economic credentials have again been given the thumbs up with international credit rating agency Standard and Poor’s (S&P) reaffirming its AAA credit rating.

It’s the second time this year that Standard & Poor’s has affirmed the government’s credit rating at “AAA/A-1+’ Ratings Affirmed; Outlook Negative”.

The ACT’s rating is the highest awarded by Standard & Poor’s, and the ACT remains the only Australian state or territory, and the only sub-national government in the Asia Pacific, with a AAA rating.

Chief Minister Andrew Barr said the decision from the credit rating agency recognised the ACT’s strong economic management and recovery plans during one of the biggest economic shocks in the national capital’s history.

“In October we released the 2021-22 Budget which set out our economic plan. We injected much-needed support into our economy to protect jobs, support our most vulnerable and invest in a pipeline of sustainable city-shaping infrastructure,” he said.

“The ACT Government is committed to our plan, supporting the growth of our economy over the coming decade. We have an ambitious target of 250,000 secure local jobs by 2025.”

The reaffirmed rating comes despite a deteriorating budget position, with the bottom line blowing out to nearly $1 billion in the red, but Standard & Poor’s said the ACT’s very high rates of vaccination were expected to help the ACT’s operating balance revert to surplus relatively quickly.

“Our rating on the ACT reflects its excellent financial management; very high-income economy, which relies on the public sector and tends to outperform most peers; and exceptional level of liquidity,” Standard & Poor’s said.

“The territory’s economy had rebounded strongly during fiscal 2021, leading to budgetary outturns considerably better than we previously expected. Australia’s excellent institutional framework also underpins the rating.”

But the ratings agency warns that delivering the government’s $5 billion infrastructure pipeline, including light rail, the Canberra Hospital Expansion and new schools, will be a challenge because governments across Australia are simultaneously endeavouring to ramp up their own infrastructure programs, hitting limits on industry capacity and skilled migration.

“As such, our forecasts assume under-delivery over the next three years,” Standard & Poor’s said.

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It said the ACT had actually underspent on capital works, relative to its budget, by 22 per cent last fiscal year and 34 per cent the year before.

Standard & Poor’s was upbeat about the ACT budgetary position, saying that its own revenue and expense forecasts were more optimistic than the government’s.

The negative outlook reflects its view that there is at least a one-in-three chance that the ACT’s fiscal recovery will underperform its forecasts.

Standard and Poor’s does not mention the shadow on the horizon, the new Omicron COVID-19 variant, but it is too early to tell what impact it may have.

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HiddenDragon8:04 pm 03 Dec 21

“……very high-income economy, which relies on the public sector…..”

There’s the nub of it – the ACT budget will, one way or another, be OK so long as the federal budget keeps funding those very high incomes, and the federal budget will, one way or another, be OK so long as China keeps buying very large amounts of Australia’s mineral exports at very high prices – and what could possibly go wrong with that……..?

The problem for ACT taxpayers/ratepayers is that the debts incurred on the basis of these rosy ratings still have to be serviced, regardless of whether reality turns out to be somewhat less rosy than the forecasts.

Who cares what S&P has to say.
S&P were rating mortgage backed securities that blew up during the GFC as AAA.
Economist Joseph Stiglitz considered the ratings agencies “one of the key culprits” of the crisis that “performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”

As for the ACT government – they have run up debt from $768m to $5.7 billion over the decade and forecast deficits averaging $520m per year over the next 4 years. They are borrowing money to pay the interest on debts, at the same time as they have driven up the cost of living in the ACT by inflating land prices and the cost of housing. Only a wall street banker could call this responsible.

Whether they should or not, the markets do care, because the credit ratings invariably drive the interest rate at which institutions can borrow. And that’s all it really matters for.

Capital Retro12:36 pm 01 Dec 21

Has the ACT Government ever actually repaid any of the huge loans it has taken on? My information is that it “rolls them over” when they fall due. I can’t see anywhere where principal is repaid and interest is probably capitalised on rollover. Just like a Ponzi scheme.

What’s your take on it, chewy14?

That is hardly a practice unique to the ACT. Most governments have been doing it on continuous rinse and recycle for a decade now, and many governments for extended periods on and off throughout history. In most cases, rollover would generally occur on maturity of bonds, not part way through, which is very unusual.

See P302-304

Of borrowings in ACT (2020-21 numbers just for example)
– $8.1 billion debt on issue (ignoring some weird and wonderful leases/PPPs/other weird stuff that isn’t the standard types of ‘loans’ we are talking about here)
– $100m of that loans from Commonwealth – traditional principal and interst payments
– $400m indexed annuity – involves principal + interest repayments like a normal loan
-$305 m Capital indexed bond – value tied to inflation, repayments just of interest with principal on maturity.
– the rest is standard government bonds – interest payments throughout life at regular periods, principal payable on maturity.

i.e. by and large they aren’t borrowing $1000 (lets say total repayments are $1200), then borrowing $1300 in 2 years time to pay back that $1200 bucks, then take another $100. By the point of rollover the interest amount is already paid, and they are effectively reborrowing the $1000 again, just with a new set of future interest payments.

Thanks for thinking of me.

I’m with JS9, government’s don’t operate like you or I have to personally and it’s not how a Ponzi scheme would operate.

Doesn’t mean there isn’t issues with how their finances are managed but they aren’t in danger of “going bust” to phrase it in the short term either.

Capital Retro9:17 am 02 Dec 21

Thanks chewy, you and JS9 appear to know accurately a lot about what goes on within the government. The only thing that differentiates the borrowings from a Ponzi scheme is the fact that the Federal Government guarantees all state and territory borrowings so they can’t “go bust” whatever happens.

Dear Chewy and JS9. Thanks for pointing out how things actually work inside government finance. But actually, here is another thought bubble that cannot be supported in any way except it’s how I feel.

To be fair – an implicit guarantee exists in the form of the RBA. Because it can always print money and buy Government bonds (and if the last 10 years have told us anything – the threat of substantial inflationary pressure from excessive printing of money in the modern world is not what it once was in previous times).

But that still doesn’t make government borrowing anything like a ponzi scheme haha.

thoughtsonthesubject11:44 am 01 Dec 21

I am wondering whether Standard & Poor’s is aware that the greater part of the infrastructure project – namely some $2 to 3 billion plus – is intended for the white elephant of the light rail extension to Woden. This will not only provide transport at half the speed of the new electric buses, but in addition comes at a considerable cost to the government by providing a good profit margin to the consortium operating it. (Buses are operated by Transport Canberra without a profit margin.) Also, P&S most probably don’t realize that the model of the 16 additional trains to be imported at great cost from Spain for the extension has shown 30 cm cracks after only 7 years of operation in Sydney and elsewhere in the world. Certainly not a good investment!

Just because buses aren’t operated on a proift through public operation doesn’t mean effectively the same outcome is achieved (i.e. paying too much), just with leakages elsewhere. In the case of Action – mainly outrageously generous conditions any pay on any reasonable comparative basis. Even before lightrail, the subsidy was well north of $100m a year if I remember rightly – which is quite astounding for a city the size of Canberra.

I’d be amazed if a privately operated bus network (under a concession arrangement), even taking into account the profit margin, couldn’t deliver what Action does at far lower cost, solely through the savings they would make by breaking the power held by some and restoring reasonableness to the conditions of the workforce. Whether that’s a desirable outcome is an entirely different conversation altogether – but I fancy its the truth.

And the value of infrastructure investment as part of an S&P or similar analysis is as much about the stimulatory impacts on the economy as much as it is about the ‘item’ being bought/delivered whatever else. While not disagreeing with comments around the woden link, public transport is very rarely (there are a few exceptions – London Underground) of public transit running at a profit, and the impact of the Woden leg, in the grand scheme of the metrics used by S&P to calculate their ratings, would be relatively marginal.

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