Western Australia feels the iron ore slump as S&P places the state on negative credit watch

Cottesloe beach in Perth. Paul Kane/Getty Images

Standard & Poor’s has put the state of Western Australia on a negative credit watch because of its weakening budget position brought about by falling royalties from iron ore.

The state has a good ‘AA+’ long-term issuer credit rating but now Standard & Poor’s sees a weakening budgetary position as a negative.

“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,” said Standard & Poor’s.

The ratings agency said Western Australia could record average operating deficits of about 1.2% over 2014-to-2018 unless the state government undertakes significant corrective measures in its 2015-2016 budget.

“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,” said Standard & Poor’s.

Standard & Poor’s has 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.

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