Announcement: Moody's: Update on Western Australia

Moody's Investors Service says that Western Australia's credit quality is supported by the budgetary flexibility to repair its fiscal performance, forthcoming increases in GST-backed Commonwealth grants -- that will eventually offset losses due to own-source revenue declines -- and some progress in reducing its pace of expenditure growth. At the same time, the state's economy continues to be supported by its rich resource base through rising volumes of exports; however, the economy has slowed considerably in the wake of the fall-off in record high mining investment combined with a significant decline in prices for iron ore.

The associated fall in royalty income along with weaker performance in tax revenues -- without commensurate reductions in expenditures -- has led to widening deficits. The larger deficits have driven up indebtedness levels rapidly and they are now above that of peers.

Moody's conclusions are contained in its just-released credit opinion on the state, "Western Australia (State of) Australia, Update to Discussion of Key Credit Factors".

Moody's has assigned debt and issuer ratings of Aa2 to the Western Australian Treasury Corporation (WATC), the entity which issues debt on behalf of the State of Western Australia and its state-owned corporations. WATC's debt is guaranteed by the State of Western Australia and the rating is based on the credit quality of the state. WATC's Aa2 rating is at the low end of the range of ratings assigned to Australian states and territories, whose ratings are in the narrow range of Aa2 to Aaa, reflecting larger deficits and a higher debt burden.

Western Australia's general government sector deficits are widening due a combination of the sharp falls in royalties that have occurred in line with lower iron ore and oil prices -- the latter are linked to LNG prices -- and a significant slowing in economic growth, which is having a more pronounced drag on tax revenues than anticipated. In addition, while GST-backed Commonwealth equalization grants eventually will rise to offset these revenue weaknesses, they are continuing to decline due to a lag in the timing of the formula.

The state's debt burden has risen sharply in recent years, as the consolidated sector incurred larger cash deficits and further projected widening in the deficits will push the debt burden higher than all other states.

The state has the capacity to narrow its deficits over the medium term, through a slower pace of expenditure growth now planned, but this will require strong government resolve. In addition, the state has the ability to adjust its own-source revenues -- including payroll tax, property-related conveyancing duties, gambling taxes and royalty income -- although this flexibility has diminished with the decline in revenues in recent years.

The state has made concerted progress to lower spending in recent years with current expenditures rising by 2.2% in FY2014/15 and 2.4% in FY2015/16, an outcome which is encouraging for fiscal progress. However, achieving these low levels consistently over the medium term will be difficult, given funding pressures in health care and other social services

Western Australia is the fourth largest state in Australia, accounting for 17.1% of national GDP, and, with 2.6 million residents, 10.9% of the country's population. While growth has slowed considerably in the wake of a record boom in mining investment, the economy continues to be supported by rising export volumes which are partially offsetting large drops in business investment. The mining sector contributes a large 26.6% to GSP -- compared to 7.2% for Australia as a whole -- with its vast natural resources dominated by its world class reserves of iron ore and also the mining of gas, alumina, nickel and diamonds.

The strong financial support provided by the Commonwealth government through fiscal transfers to all states is also a key factor in Western Australia's ratings. The state receives lower amounts of grants than other states -- comprising 31.3% of its revenues in FY2015/16 -- largely because of its historically above-average revenue-raising capacity. However, equalization grants eventually will provide a stabilizing effect and will rise to reflect Western Australia's weaker revenue performance in relation to other states.