Ratings agency Moody’s has lowered Western Australia’s credit rating one notch to Aa2 today citing a deterioration in the state’s “financial and debt metrics and an increasing risk that its debt burden will be higher than indicated in its FY2015/16 midyear report”.
“The drop in the price of iron ore and the sluggish performance in state taxes have led to declines in revenue, and, absent corresponding expenditure measures, budget deficits are widening significantly,” said Moody’s.
The ratings agency noted that the states reliance on volatile royalty income to fund a sharp increase in future spending had “exacerbated the impact of falling iron ore and oil prices on its budget outcomes”.
“The decline in royalties — they now comprise a lower 14.8% of revenues down from a peak of 21.6% in FY2013/14 — and lack of financial cushions against adverse movements in commodity prices and exchange rates, is leading to a significant widening in deficits,” said Moody’s.
“The state’s expectations that rising production and exports would in part fill the void left by the completion of large iron ore and LNG projects are being dampened by the slowdown in China. Also falling commodity prices and slowing growth in China will reduce business investment, a key driver of the state’s economy.”
While Moody’s downgraded the state to Aa2, the third-highest rating on its scale of creditworthiness, the group changed the states ratings outlook to stable, suggesting that follow-up reduction in the credit rating is unlikely in the near-term.
“A stable outlook has been assigned to the ratings because of the support provided by Australia’s institutional framework to states and territories, and, expectations that Western Australia’s policy response will strengthen if its fiscal performance deteriorates well beyond what is projected,” said Moody’s.
The ratings agency noted that “a further significant widening in deficits that could occur due to further revenue weakness, without a stronger policy response — leading to a more rapid debt accumulation and significantly higher debt burden then currently projected — would place downward pressure on the rating”.
It also suggested that “the ongoing weakness in commodity prices will continue to weigh on the state’s credit profile and will limit headroom within the rating”.
Iron ore, Western Australia’s largest goods export by dollar value, has fallen by close to 75% over the past five years, placing pressure on the Western Australia’s budget position.
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