WA rating hostage to iron ore
Deutsche Bank economists have warned the plunging iron ore price could put the State Government's credit rating at further risk as Standard & Poor's prepares to release a new round of credit assessments of State governments in coming weeks.
In a note released yesterday, Deutsche economist Phil O'Donaghoe said the impact of low iron ore prices on State Government revenue projections would likely be a key focus of the next S&P review of WA's credit rating.
S&P was the first agency to strip WA of its AAA credit rating last September, criticising the Government for lacking a "convincing plan" to return the State Budget to surplus.
Moody's followed S&P's lead and downgraded WA's credit rating two weeks ago.
Mr O'Donaghoe said WA Treasurer Mike Nahan used bullish benchmark iron ore prices of $US122.70/t when estimating Government royalty revenue for the 2015 financial year.
Spot prices have so far averaged $US92/t this financial year, with most analysts projecting a weak short-term price recovery.
"Relative to the price projections provided in the 2014-15 WA Budget, recent weakness in iron ore prices imparts a material downside risk to WA's general government revenue forecasts, in our view," Mr O'Donaghoe said.
"We would assess the risks of further rating action by S&P as finely balanced."
The State Government's iron ore price projections over the forward estimates period diverge sharply from those of commercial analysts. Budget forecasts predict a $US120.10/t average in 2015-16, falling to $US115/t by 2017-18. The consensus analyst estimate tips the spot price for 62 per cent iron ore to average $US100/t this financial year, according to Bloomberg, falling to $US95/t by 2017-18.
Mr O'Donaghoe noted S&P would consider WA's share of GST revenue to rise if iron ore royalties fell in the short term.
"Over time, this should mitigate the 'bottom line' impact on the State's finances," he said.
