Influential ratings agency Standard and Poor’s has warned that WA’s economic outlook could be downgraded from its AAA status because of the State’s dependence on the resources sector.
The assessment will send a tremor through the Barnett Government as it continues to prepare the State’s mid-financial year review of the Budget
Standard and Poor’s lays its concerns firmly at the feet of WA’s reliance on royalties in the face of falling GST revenue.
“The negative outlook reflects our view that there is a one-in-three chance of a ratings downgrade in the coming 24 months,” said credit analyst Claire Curtin.
“We consider that revenue pressures arising from WA’s reliance on mining could result in a material weakening in operating margins, further weakening our view of budgetary performance.”
The ratings forecast comes in spite of a rally in the price of iron ore, which is currently $118.10 per tonne.
Credit analyst Claire Curtin said the WA Treasury faced challenges.
“We consider that WA’s increased budgetary reliance on royalties and the strong rises in its expense base, combined with the time-lag in GST relativity adjustments that offset reductions in own-source revenues, may pose challenges for WA’s budgetary performance in the short-to-medium term,” she said.
Fellow ratings agency Moody's, in its last report on WA in may, said the State had a manageable but rising debt burden with ample budget flexibility.
However, it cautioned a failure to reduce debt levels could lead to a downward pressure of its sovereign rating.
“The ratings could be lowered if our revenue expectations materialize,” said Ms. Curtin.
“The ratings could be revised to stable if revenues prove less volatile than we expect, most likely from a more stable economic environment, while budgetary performance improved and WA’s liquidity cushion increased. This would provide some buffer against volatility.”
Treasurer Troy Buswell said the fact that WA maintained its AAA rating was a positive result.
“I think the observations of Standard and Poor’s support and endorse the recent cost savings measures the Government has introduced,” Mr Buswell said.
“These are challenging times for the State’s finances. I am very confident the steps we are taking will see us maintain our AAA credit rating."
He said 20 per cent of State revenue came from mining royalties compared to five years ago when the income from royalties made up nine per cent of our revenue.