WA downgrade alert! From S&P:
OVERVIEW
• We have placed our ‘AA+’ long-term issuer credit rating on the State of Western Australia on CreditWatch negative due to the state’s weakening budgetary position.• Slumping iron ore prices will considerably reduce the state’s mining royalties, and without corrective actions by the state, we forecast that its operating position will sustain deficits for the foreseeable future.
RATING ACTION
On April 14, 2015, Standard & Poor’s Ratings Services placed its ‘AA+’ long-term foreign- and local-currency issuer credit ratings on the State of Western Australia on CreditWatch with negative implications. At the same time, we affirmed the ‘A-1+’ short-term rating on the state.RATIONALE
The CreditWatch placement on Western Australia reflects our view of its weakening budgetary performance because of lower mining royalties as a result of steeply falling iron ore prices. Unless the state government undertakes significant corrective measures in its June 2015-June 2016 budget, Western Australia could record average operating deficits of about 1.2% over 2014-to-2018. This sustained level of deficits would make the state’s budgetary performance no longer consistent with a ‘AA+’ rating and would further increase its debt burden.On April 13, 2015, Standard & Poor’s lowered its iron ore price assumptions to an average of US$45 per dry metric ton for the rest of 2015, US$50 per ton in calendar 2016, and US$55 per ton in calendar 2017 (see article titled, ” Standard & Poor’s Revises Its Iron Ore Price Assumptions”, published April 13, 2015). These revisions are down from our previous base case for iron ore prices of US$65 per ton for the rest of 2015 and calendar 2016, and US$70 per ton for calendar 2017 (published in January 2015).
The ratings on Western Australia reflect our view of the extremely predictable and supportive institutional framework benefiting state and territory governments in Australia, combined with its very wealthy although concentrated economy, strong financial management and liquidity (albeit a “less than adequate” debt service coverage), and low contingent liabilities. Partially offsetting these strengths is Western Australia’s “very weak” budgetary performance, and “average” budgetary flexibility and debt burden.
In its 2015 budget, the government targeted a reduction in net debt of A$2 billion by the year ending June 30, 2018, among other fiscal targets. Additionally, it announced a further A$1.8 billion of savings measures to address falling mining royalties in December 2014. In our opinion, there will be slippage in achieving these targets as there has been in the past, when a number of Fiscal Action Plan revenue and expenditure measures were revised after the 2014 budget. This potential slippage reflects, in our view, limited political will to make difficult decisions. In the absence of implementing significant policy changes, it appears that Western Australia will not achieve these targets and its budgetary performance will substantially weaken.
We forecast Western Australia’s average debt burden will rise substantially to 114% of operating revenues in fiscal 2018, due to its weaker budgetary performance. With a sizable capital-expenditure program and operating deficits, Western Australia will need to increase its borrowings substantially unless corrective measures are undertaken. Western Australia’s interest expenses are likely to remain under 5% of operating revenues in the medium term.
A foretaste of the sovereign within three years.
