Below trend growth to continue
The strong return of international students is helping to bolster a sector undergoing post-pandemic changes amid challenging economic conditions.
For many, attending “O-Week” in 2023 marked something of a return to regular campus life after the fog of Covid lockdowns that changed the cultural and educational experience for the sector.
Among those returning are thousands of international students seeking a quality Australian higher education after the borders reopened and the backlog of student visas started to clear.
But while resilience is in the air, the global challenges of a high-inflationary environment, ongoing demographic shifts in student-aged populations and geopolitical tensions still abound.
To help explore the implications for the higher education sector in Australia, NAB recently held its first Corporate and Institutional Banking University Economic Update for 2023, with special guest John Manning from Moody’s Investor Service to give his global insights on the sector along with credit rating trends.
Manning is Vice President and Senior Credit Officer at Moody’s Australia and says the difference in education year timings provides a valuable opportunity to track developments from the northern to southern hemisphere.
Moody’s rates about 600 universities and colleges worldwide and Manning says the return of international students across jurisdictions has been a clear credit positive for those institutions with strong international reputations who are able to preserve demand. China dropping its zero-Covid policy has also been a welcome boost for the sector
“It’s clear that in some jurisdictions overall we’re pretty much back to pre-pandemic strength,” he says. “In Australia, international student recovery is back and it’s great. Enrolments are very strong.”
Government figures on international student visa processing show significant recovery in recent months, likely reflecting some pent-up demand. The two-year extension of work rights for international student graduates in Australia from July this year is also “very much credit positive” for Moody’s.
But outside of “the magic pot of international students recovering” the reality of revenue growth running below inflation remains a sector-wide challenge globally, Manning says.
In the US, Moody’s research shows that with muted growth across multiple revenue streams and a drop in federal pandemic aid, more universities are likely to run deficits in fiscal 2023. The figures show the situation is worse among public institutions than private.
“When we’re talking about an operating deficit, we’re talking of an operating margin less than negative 2 per cent, so you can see the significant revenue pressures that are going to be squeezing margins there,” he says.
On tuition revenue, Manning says inflation impacts on affordability limit the ability to raise fees, with potential discounting for universities as the attractiveness of colleges increases. Government influence is also a key factor, noting a key example being UK domestic undergraduate fees which have been frozen until 2026/27. In Canada there is increased potential for further support after a lean period as the fiscal health of governments there improves.
Other sector-specific credit themes globally include increased borrowing to fund capital expenditure with uncertain returns. Some universities are pausing plans rather than overspend in a challenging construction environment, Moody’s research shows.
“It’s fair to say that we just can’t ignore what is going on overseas,” Manning says. “These challenges are there and we have to adapt to them.”
Higher education in Australia has already shown its resilience in adapting across the pandemic. Overall, universities responded quickly and effectively in the move to tech-enabled hybrid models, while delaying or cutting spending to protect financial positions, Manning says.
Moody’s is also watching developments associated with the universities accord this year, which is a federal review of the sector chaired by former NSW chief scientist Professor Mary O’Kane.
The big picture review is looking at any changes needed to serve the nation’s interest in the coming decades. It is set to deliver its findings to Education Minister Jason Clare in December, with recommendations likely to be adopted from 2025 onwards.
Manning says as part of this, Moody’s analysis is looking at whether in a post-pandemic world international student revenue will be the optimal funding tool for research.
Another issue being watched is the softer domestic enrolments experienced this year, with the roll-off of guaranteed Commonwealth subsidised places (CSPs) having clear funding implications.
Manning says the drop-off in local students may be a factor of low unemployment levels or of students now having a gap year denied to them during the pandemic. But it remains a challenge that still needs to be understood.
On overall university demographics, he says the Peter Costello-era “baby bonus” policy had locally helped alleviate some of the pressures being faced in the US and Canada on university-aged populations, but the issue would likely become a headwind around 2026 as the level of high-school graduates tapers.
Moody’s is also monitoring how rapid technological advances are providing both challenges and opportunities for research.
“ChatGPT and AI generally is a significant driver on our radar at the moment – it’s a big blip,” Manning says. “We’re watching it from the context of how you participate in it but also how do you protect from it.”
For instance, there is the potential of artificial intelligence chatbots, like the popular ChatGPT, to draft university papers, while the rise in cyber threats clearly needs to be addressed from a security perspective.
“If a university doesn’t have robust cyber processes and protections it’s going to find it increasingly challenging to get research funding, particularly if they are aligned with defence. It really is a significant factor at play,” Manning says.
On the upside, however, these cyber challenges also provide education growth opportunities too, he adds.
NAB Corporate and Institutional Banking Chief Economist, Ivan Colhoun, says new technologies have tended to create jobs historically as an aggregate but it was better to be skilled to avoid the disruption that can accompany these industry changes.
Introducing the session, Colhoun said the economic outlook has been challenging for many sectors, albeit with inflation now moderating. He noted universities, along with tourism, would be on a somewhat different cycle to the rest of the economy, given pent-up demand and especially with China reopening.
“The good news is that tourism arrivals have bounced back pretty strongly as have student visas. I think that’s going to be important for the labour market and for wages broadly and that is a positive development. It does look like the worst has past and that China policy decision on foreign students returning overseas was a big one.”
Colhoun also said rising rents could see the number of share households pick up again for students following a Covid-trend towards more single or couple-based dwellings that had affected supply along with construction challenges. Housing supply is one factor that could affect student numbers or motivate additional investment in student accommodation.
While input costs and other inflationary pressures remain very elevated, Colhoun says they are now beginning to ease in the goods space, especially offshore, though services inflation remains elevated and Australia is lagging the US in the cycle.
Colhoun says the focus of central banks was now squarely on the need to return inflation to target and make sure wage and price setting behaviour does not shift permanently higher, with growth and unemployment very much secondary considerations.
The NAB University Economic Update session was hosted by NAB’s Head of Government and Education, Client Coverage, Michael Bedwell.
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