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State gets ratings warning
State gets ratings warning

Global ratings agency Moody's says WA's cherished triple-A financial tick is safe for now, but warns the Government's increasing reliance on mining royalty revenues could undermine its rolled-gold investment standing.

Debra Roane, Moody's lead analyst for Australian State Government finances, told _WestBusiness _ yesterday that the agency was keeping a close eye on WA's books given iron ore prices - and thus the bulk of WA's royalty income - were falling.

"It is something we are definitely watching," she said. "Clearly as the State has become more reliant on royalty revenues, they are therefore exposed to fluctuations in the Australian dollar, commodity prices, production levels, global conditions, growth in China - a number of factors."

_WestBusiness _ reported at the weekend that the soaring Australian dollar combined with weak iron ore prices could deliver a double-whammy to the State Budget, potentially wiping $700 million from the Government's bottom line this year.

Iron ore prices have been hit by the slowing Chinese economy.

If current prices of about $US117 a tonne ($110.6) are maintained for the rest of the year, the hit to the Budget would be about $330 million based on Treasury estimates that prices would average $US127.30/t over 2012-13.

Plus, in a rare occurrence, the weakness in the nation's key export commodity has not translated into the usual fall in the Australian dollar, which is being artificially boosted by offshore investors seeking a safe haven from financial turmoil in Europe and the US.

The currency closed above $US1.05 yesterday. This is bad news for the Government's stretched Budget, because every rise of US1¢ strips about $60 million from the State's coffers because of lower mining royalties.

Treasury assumes the currency will average about US99¢ over this financial year, or US6¢ below the current rate.

If that level is maintained for the rest of the year, the cost to the Budget would be about $360 million, wiping out the forecast surplus in 2012-13 of $196 million.

Ms Roane said one mitigating factor in future years was that falls in royalty revenue would be eventually offset by higher GST revenues, under the complex formula used to divide the nation's GST pie. She also said that while WA's triple-A rating was labelled "stable", she would expect the Government to institute savings if necessary.

Treasurer Troy Buswell has said the Government was closely monitoring all its revenue, including taxes, and would take action to "balance our financial and service delivery objectives" in the lead-up to the mid-year review in December if necessary.