Fresh from our rating agency friends:
SYDNEY (Standard & Poor’s) Oct. 25, 2012–Standard & Poor’s Rating Services said today that it has revised its outlook on the Australian State of New South Wales (NSW) to negative. At the same time, the ‘AAA/A-1+’ issuer credit ratings on NSW were affirmed. The outlook on the government’s financing arm, New South Wales Treasury Corp (TCorp) was also revised to negative, and the issuer credit ratings were affirmed at ‘AAA/A-1+’.
“In our view, there are increasing pressures on the New South Wales government to increase its investment in infrastructure,” said credit analyst Claire Curtin. “These capital expenditure pressures, combined with our view of the state’s moderate budgetary performance, lead to our opinion that NSW’s budgetary flexibility may become increasingly challenged. The negative outlook reflects our view that there is a one-in-three chance of a downgrade in the coming 24 months, based on our view that NSW’s budgetary performance could weaken and might not provide NSW with the capacity to undertake its infrastructure program while managing to contain its debt burden.”
The ratings could be lowered if the state’s operating performance continues to weaken and does not provide NSW with the capacity to undertake its infrastructure program while managing its debt burden. The ratings could be revised to stable if there were a demonstration of revenue flexibility either through a strengthening of own-source revenues or profitable asset sales, thereby allowing for greater capital investment without increasing the state’s debt burden.
“We view NSW’s budgetary performance as moderate, reflecting the state’s after-capital-account deficit, which is in excess of 10% of adjusted operating revenues. We consider its cash operating performance to be good, averaging a surplus in excess of 5% of adjusted operating revenues, but risks are on the downside.
The ratings on NSW reflect our view of the strong institutional framework governing Commonwealth-state relations in Australia, as well as NSW’s wealthy and diversified economy, positive financial management, excellent liquidity position, and exceptional access to global funding markets. These strengths are offset by moderate budgetary flexibility and performance, reflecting both a challenging revenue environment and an increasing need to address the state’s infrastructure backlog.
Despite slow growth over the past decade, we view NSW’s economy as strong and diversified, and supportive of the ratings. Per capita income is high, at about A$60,000 per year, and represents about one-third of Australian GDP. Growth has lagged the national average, as NSW has had only limited exposure to the mining boom. The financial services sector is the largest industry contributor to the economy, at 13% in fiscal 2011.
We consider that NSW’s financial management as having improved over the past 18 months, including tighter revenue and expenditure management and closer monitoring of government business performance; but we also consider that long-term issues of sustainable infrastructure investment will continue to challenge the government in the delivery of solutions to long-term issues.
