The outlook on Western Australia's AA+ credit rating has been downgraded from stable to negative, with Moody's Investor Services saying the government needs to fortify its commitment to budget improvements.
The outlook on Western Australia's AA+ credit rating has been downgraded from stable to negative, with Moody's Investor Services saying the government needs to fortify its commitment to budget improvements.
Moody's said the revision reflected the ongoing deterioration in WA's financial and debt metrics.
The company said WA's deficit position – as measured by the ratio of net lending to borrowing – was projected to widen, as revenues declined due to the drop in the price of iron ore without other revenue sources to balance it.
"The rapid rise in iron ore and other royalties, as commodity prices spiked to record highs in 2013, along with adjustments to the royalty rate, pushed up the state's reliance on this volatile source of revenue to 21.6 per cent of income in FY13-14 from 8.4 per cent in FY06-07," Moody's said.
"At the same time, these windfalls fueled a rapid rise in current expenditures, with significant enhancements to healthcare, education and justice services resulting in deficit operations during a period of strong economic growth."
Moody’s said with a near halving of the iron ore price in the past 12 months, coupled with a reduction in GST-backed Commonwealth grants, the state had forecast a record-high deficit equal to 13.8 per cent of revenues for FY15-16.
“This level would be considerably higher than the 1.4 per cent forecast last year for FY15-16, and also higher than the December 2014 mid-year estimate of 4.8 per cent of revenues,” the agency said.
“The deteriorating budget results are exacerbated by the lack of financial cushions against adverse movements in commodity prices and exchange rates.”
Net direct and indirect debt rose to 99.6 per cent of revenues in FY13-14, up from 44.4 per cent in FY07-08, Moody’s said, and is forecast to rise to 122.7 per cent in FY15/16 before stabilising over the medium term.
However, on a positive note, Moody’s said the state had implemented some structural changes to ease the rapid growth in public sector employee costs, with measures including the capping of agency salary budgets to CPI, limiting wage adjustments to CPI, and passing legislation to allow for involuntary redundancies.
The state is also planning a series of asset sales that could ease the state’s debt levels.
“Ultimately, Moody’s thinks that the state will be hard pressed to achieve the much lower end of current spending forecast, unless the government fortifies its commitment to budget improvements,” it said.
“Also, while the state’s economy is slowing from very high rates of expansion, growth will pick up in coming years as production and exports related to large investments in liquefied natural gas and iron ore mines ramp up.”
