Western Australia was stripped of its top credit rating by Moody’s Investors Service as the state’s increasing reliance on resource royalties threatens efforts to repair its finances.
Moody’s lowered the state’s ranking to Aa1 from Aaa and changed its outlook to stable from negative, according to a statement today. The government’s assumptions for mining royalties are based on a “fairly optimistic forecast” for iron ore prices, while the state faces spending pressures due to rapid population growth, the ratings company said.
“Western Australia’s debt burden has risen sharply in recent years,” Moody’s said. “The state will be hard pressed to meet its very low spending growth targets, unless the government’s fiscal resolve strengthens and new measures are identified.”
The spot price of iron ore, the state’s largest export, has dropped 33 percent since Dec. 31 to $90.10 a ton, according to The Steel Index. While Western Australia has based its spending plans on the price averaging $122.70 a ton this fiscal year, analysts surveyed by Bloomberg predict the steelmaking material will hold closer to current levels through 2018. The downgrade by Moody’s follows Standard & Poor’s decision to remove its top credit grade last September.
The state’s operating surplus for the current period was forecast at just A$175 million ($163 million) and the iron-ore plunge means inflows could be trailing estimates, according to revenue sensitivities provided in the state’s May budget.
The government’s plans to address its fiscal problems “are positive steps but are not expected to lead to significant improvements in the near term,” Moody’s said. “Minimal improvement is expected in the financial performance in” the current financial year.
Treasurer Mike Nahan said in a statement that Western Australia’s net debt level remained affordable and the government is committed to regaining its top credit ratings at both Moody’s and S&P. He said the outlook for the economy remained strong and further measures would be considered at the upcoming mid-year review.
“We don’t anticipate any significant increase in the cost of borrowing as the lower credit rating was factored into the forward estimates at the time of S&P’s rating action,” Nahan said.
Western Australia’s bonds are the worst performers among the Australian states in 2014, according to Bank of America Merrill Lynch data. Securities sold by Australia’s biggest state by area have returned 5 percent since Dec. 31, compared with 6.1 percent for an index of the nation’s provincial notes.