Late yesterday Moody’s added to WA’s building woes:
Moody‘s Investors Service has revised the outlook on Western Australian Treasury Corporation’s (WATC) Aa1 ratings — backed by the State of Western Australia — to negative from stable. At the same time, Moody‘s has affirmed its debt and issuer ratings at Aa1. WATC’s Euro Medium Term Note Programme’s (P)Aa1 rating and the Prime-1 ratings on its commercial paper program and short-term issuer rating remain unchanged.
The change in outlook to negative from stable reflects the ongoing deterioration in Western Australia’s financial and debt metrics. The
state’s deficit position — as measured by the ratio of net lending to borrowing — is projected to widen, as revenues decline due to the drop in the price of iron ore without corresponding measures to adequately redress the budget deficits. These larger deficits will likely increase the state’s debt burden which, although still manageable, is at a higher level than its peers.The rapid rise in iron ore and other royalties, as commodity prices spiked to record highs in 2013, along with adjustments to the royalty rate, pushed up the state’s reliance on this volatile source of revenue to 21.6% of income in FY2013/14 from 8.4% in 2006/07. At the same time,
these windfalls fueled a rapid rise in current expenditures, with significant enhancements to healthcare, education and justice services resulting in deficit operations during a period of strong economic growth.With a near halving of iron ore prices over the past 12 months, along with a reduction in Goods and Services-backed (GST) Commonwealth grants — due to the lag in the application of the equalization formula — the state has forecast a record-high deficit equal to 13.8% of revenues for FY2015/16. This level would be considerably higher than the 1.4% forecast last year for FY2015/16, and also higher than the December 2014 mid-year estimate of 4.8% of revenues. This forecast follows an estimated deficit of 11.6% of revenues in FY2014/15, and reflects similar trends. The deteriorating budget results are exacerbated by the lack of financial cushions against adverse movements in commodity prices and exchange rates.
And today:
Rating agency Fitch downgraded its outlook on BHP Billiton and Rio Tinto from stable to negative, after revising down its price assumptions for iron ore, copper and nickel earlier this month.
BHP Billiton, the world’s largest mining firm, held its A+ rating but Fitch said on Wednesday the spin-off last month of some of its assets into a new company named South32 would have a marginally negative effect on its credit rating in the near term, weighing on projected free cashflow generation.
The outlook downgrade on A- rated Rio Tinto, the world’s second-largest mining firm, was on the back of weaker price expectations for iron ore, its main product.
Poor optics that these come as the iron ore price rockets higher but they are still right. The price recovery will be temporary.
