Water stress a threat to NSW’s credit rating

Natural disasters related to climate change will pose long-term challenges for the New South Wales (NSW) economy, according to credit rating agency Moody’s.

The agency also warned that water-related stress would be the most significant issue for Sydney by 2030, with significant investment needed to ensure water supply.

In an assessment of the budgetary pressures created by events such as droughts and bushfires, Moody’s said these would “test the capacity of NSW to mitigate the associated costs”.

John Manning, a Moody’s Vice President and Senior Credit Officer, said the current drought alone had required about $2 billion in “new support measures” this financial year.

“The 2019-20 bushfire season and ongoing drought – the worst on record – have materially disrupted economic output across regional NSW and have increased the state’s budget pressure,” he said.

While the short-term implications from the current crises are limited, Manning said NSW will face significant pressure in the future as it seeks to adapt to climate change and improve responses to droughts and bushfires.

In particular, the exposure to a potential water supply crisis requires “long term, significant infrastructure spending in water supply and management, especially as the population continues to rise”, Moodys said in its report.

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And with bushfire seasons predicted to become longer and more extreme, NSW will also need to invest in additional infrastructure to support firefighting efforts.

“In addition to hindering agricultural production, the prolonged drought is also exacerbating future water stress risk in Greater Sydney – an area that accounts for a growing share of NSW’s overall economy,” Manning said.

“We currently consider water stress to pose the greatest risk to this part of NSW over the longer term.”

NSW has the largest economy in Australia, accounting for one-third of the country’s gross domestic product, and has the highest tax revenue per capita among the states.

“We therefore expect NSW’s revenue base to be sufficiently robust to navigate the current drought and bushfire season,” Moody’s said in its report.

“Despite increasing spending to respond to and support communities impacted by the crises, we expect the state to retain its strong fiscal resolve and manage rising cost pressures, such that annual expense growth remains less than long-term average revenue growth of 5.6%.”

Responding to the report, NSW Treasurer Dominic Perrottet said “our budget is strong, our people are resilient and our state’s future is bright”.

“The Moody’s report highlights the diversity and strength of the NSW economy and in the face of these challenges expects the NSW government to maintain its current rating and outlook,” he said.

“It is too early to say what the full impact of the fires will be on the budget, but we have assured the Emergency Services Minister David Elliott and the RFS they will get whatever support they need.”