From Standard and Poors this arvo:
Standard & Poor’s Ratings Services said today that its ‘AA+/Stable/A-1+’ issuer credit ratings on the State of Western Australia are not immediately affected by the recent fall in iron ore prices to less than US$90 per ton. The potential loss in the state’s iron ore royalties would not by itself lead to a lowering of the ratings. We anticipate the Western Australian government’s operating balance will remain in surplus after considering the potential earnings loss, at between 0% and 5% of operating revenues. At the same time, we project the state’s after-capital account deficits will remain at between 5% and 10% of total revenues. In addition, the Western Australian government should eventually gain from a change in GST relativities, which would compensate the state for a fall in its own-source revenues. However, there would be a time lag in the state receiving higher GST revenues since GST relativities are calculated on a moving average formula.
The Western Australian government’s budgetary position remains susceptible to external shocks, in particular commodity prices. This is because the state has a significant concentration to the mining sector, at 36% of its Gross State Product (GSP) at June 2013, compared to an average of about 10% for Australian states. Royalty income is therefore an important source of funds to the state, estimated to be at 14% of operating revenues at fiscal 2014, and is likely to remain so with the mining sector moving from the construction to production phase. In particular, the recent fall in iron ore prices is likely to worsen the state’s budgetary performance as the commodity comprises 90% of the state’s royalty income.
Should iron ore prices remain at US$90 per ton, we expect the Western Australian government to lose about A$1.6 billion in operating revenue in fiscal 2015 and about A$5.7 billion over the four years to fiscal 2018. There is limited headroom in the ratings for iron ore prices to decline further without a suitable fiscal response from the state, either through additional revenue and savings measures, or a cut in capital expenditures. Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
Expect downgrades.
