Australia's Iron Ore State Has Rating Cut by Moody's Amid Rout

  • Western Australia at risk of worse-than expected debt burden
  • State now carries weaker rating than all its Australian peers

Western Australia had its credit rating cut by Moody’s Investors Service as the global rout in metal and energy prices curtails the government’s revenues.

The state, which is the country’s hub for iron ore production, is heavily reliant on income from royalties, and has been hurt as the steelmaking material plunged more than 60 percent in the space of two years even as production volumes surged. The one-level downgrade to Aa2 means the government’s rating is the lowest among any of the Australian states assessed by Moody’s and is two levels lower than Aaa rated New South Wales and Victoria.

Moody’s said there was an increasing risk that Western Australia’s debt burden would be higher than the government indicated in the mid-year update presented in December, when the state estimated net debt would rise to A$39 billion ($27.6 billion) by the end of June 2019. The credit assessor said ongoing budget deficits could push the state’s debt burden to 140 percent of revenue in the 2016-17 fiscal year.

“The drop in the price of iron ore and the sluggish performance in state taxes have led to declines in revenue, and, absent corresponding expenditure measures, budget deficits are widening significantly,” according to Moody’s, which has a stable outlook on the issuer. “As a result, the state’s debt burden is rising to a level that is higher than that of its peers.”

Western Australia’s prospects are being hampered by a “subdued economic outlook” and the slowdown in Chinese growth, according to Moody’s.

The yield premium over the swap rate on Western Australia’s July 2025 bond, its longest-dated note, has widened to 61 basis points as of 3 p.m. on Monday in Sydney from 34 a year ago, based on Commonwealth Bank of Australia pricing.

The Perth-based government is rated AA+ at Standard & Poor’s, the equivalent of one level higher than at Moody’s, albeit with a negative outlook.

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