From S&P:
MELBOUNRE (Standard & Poor’s) Sept. 26, 2012–Standard & Poor’s Ratings Services said today that it has lowered its long-term issuer credit rating on the Australian State of South Australia and the state’s financing arm, South Australian Government Financing Authority, to ‘AA’ from ‘AA+’. At the same time, we affirmed the ‘A-1+’ short-term rating on both entities. The outlook is stable.
The rating action reflects our view that revenues across the forward estimates will be weaker than reflected in the 2013 budget, due to a lower GST pool than forecast, as well as weaker conveyance duties from 2014. While we expect that some cost savings will be achieved, we anticipate that there will be slippage in expenditures, contributing to worse-than-anticipated budgetary performance.
Our adjustments to South Australia’s budget forecasts have resulted in a further downward reassessment in our expectations for South Australia’s budgetary performance in the medium term. We anticipate budget performance will be weaker than forecast by the South Australian government, and that South Australia will post adjusted cash operating deficits until 2014. We further expect the adjusted cash operating balance to remain under 5% through the forward estimates, and the average deficit after capital expenditure to be in excess of 10% of revenues.
These anticipated operating deficits will lead to a sharper rise in the gross debt level of the non-financial public sector than the 70% foreshadowed by the budget in fiscal 2015, to around 80% of consolidated revenues. Unfunded superannuation remains a significant future obligation for South Australia; with superannuation liabilities restated to a 5% discount rate, they represent about 60% of consolidated revenues.
The ratings on South Australia remain supported by: the strong institutional framework governing federal-state relations in Australia, and thestrong foundations for financial-management practices in Australia that this also provides; South Australia’s wealthy economy in an international context; and its low level of contingent liabilities. South Australia’s very weak budgetary performance, its limited budgetary flexibility, and moderate debt burden all weigh on the rating.
“The stable outlook reflects our view that the strong institutional framework and financial management settings in Australia help offset–to a point–South Australia’s potential weaker budgetary performance,” said credit analyst Claire Curtin. “Upside potential within the rating horizon is viewed as unlikely, requiring a significant and sustained improvement in South Australia’s budgetary performance–an adjusted cash operating surplus of around 5% and a deficit after capital expenditure of less than 10%–combined with a reduction in the debt burden to less than 60% of revenues.”
Downside ratings pressure is also not expected within the next 24 months. Debt would need to rise even more substantially than we expect, to greater than 120% of revenues, or the interest burden to exceed 5% of revenues, which would likely combine with a negative reassessment of financial management and ongoing debt funding of cash operating deficits.
