Western Australia’s credit rating may be cut by Standard & Poor’s as falling iron-ore prices hit the state’s mining royalties and weaken its budget position.
The state’s AA+ rating was placed on credit watch with negative implications, S&P said in a statement on Tuesday, forecasting budget deficits for the foreseeable future without action by Premier Colin Barnett’s government.
The slump in iron ore prices below $50 a ton is eroding government revenues in Australia and forcing smaller mining operations in the nation’s west to close. Barnett has called for miners including BHP Billiton Ltd. and Rio Tinto Group to slow production growth in an oversupplied market.
S&P on Monday placed the credit ratings of eight iron-ore producers globally on “watch negative” after lowering price assumptions through to 2017 and forecasting an average price of $45 a metric ton this year.
Iron ore prices have plunged 31 percent this year as surging supply from Rio, BHP and Brazil’s Vale SA spurred a glut amid a slowing Chinese economy.
Unless the state government “undertakes significant corrective measures” in its budget due to be delivered May 14, Western Australia “could record average operating deficits of about 1.2 percent over 2014 to 2018,” a level inconsistent with its current rating, S&P said.
Western Australia’s bonds have delivered a gain of just 2.3 percent this year, the worst return after South Australia in a Bank of America Merrill Lynch index of Australian provincial debt.
The yield premium over sovereign debt on Western Australia’s 3.75 percent note maturing October 2018 on Tuesday climbed to 45 basis points, the most on record, according to Commonwealth Bank of Australia prices.