Western Australia Budget Deficit Shows Boom Turning to Bust

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The state at the forefront of Australia’s biggest resources boom since the 1850s gold rush forecast a worsening budget deficit next year as plunging commodity prices hit revenue.

Western Australia’s government said its net operating deficit for the year ending June 30, 2016 will double to A$2.71 billion ($2.2 billion), from a A$1.29 billion gap in 2014-15, which was its first shortfall in 15 years. Economic growth is forecast to slow to 2 percent in the next fiscal year, the lowest rate since 1990-91, while net debt will peak at A$36.3 billion in June 2018.

Treasurer Mike Nahan is turning to asset sales to reduce debt as a 39 percent fall in iron ore prices in the past 12 months hits the state’s finances. Standard & Poor’s put Western Australia on notice last month that it may cut its AA+ rating due to falling mining royalties that are weakening its budget position.

‘There’s a sober realization now in the state that things have changed,’’ said Michael McLure, a professor of economics at the University of Western Australia Business School. “The government now has a growing debt problem that it’s trying to manage at a very difficult time.”

Moody’s Investors Service said the projected increase in the state’s debt burden is a credit negative. S&P said the state’s AA+ rating remains on negative watch and it expects to come to a decision on the rating by about mid-July.

Roller-Coaster Ride

State Premier Colin Barnett, who said in 2010 that “China is giving us the ride of our lives,” is now seeing the other side of the resources roller-coaster as the nation’s once-insatiable hunger for commodities wanes. His government’s challenge to counter slowing growth and declining revenue is replicated on a national scale by his conservative ally Prime Minister Tony Abbott.

Abbott’s government announced on Tuesday that Australia’s deficit in the year through June 2016 will be A$35.1 billion, or 2.1 percent of gross domestic product, while the economy is in the midst of its longest stretch of sub-par growth since 1991 as it struggles to pick up the slack after the slump in mining.

For Western Australia, a state four times the size of France and home to mining magnates such as Gina Rinehart and Fortescue Metals Group Ltd. founder Andrew Forrest, there’s no quick fix.

While it produced 61 percent of the nation’s mineral and energy exports in 2014 from its mainly arid Outback landscape, the value of those commodities shows no signs of a speedy return to the halcyon days that spurred Barnett to embark on major infrastructure projects such as building a new quay, a new football ground and redeveloping the state capital’s central railway station.

Raising Cash

Now it’s looking to sell off assets to raise cash. After previously announcing it would sell port terminals and facilities at Port Hedland and Kwinana, Nahan said on Thursday the sales program would be “significantly expanded” to include the Fremantle Port Authority. The government will consider selling the Forest Products Commission and state-owned office buildings.

Barnett has called on miners including BHP Billiton Ltd. and Rio Tinto Group to slow production growth in an oversupplied market to help arrest the iron ore price decline. His government is forecasting a price of A$47.50 a ton in 2015-16, in line with the federal government’s A$48 a ton forecast.

The Australian government forecast in its budget on Tuesday that mining investment would fall by 26 percent in the year ending June 30, 2016, and slump 31 percent more the year after.

Trailing States

Western Australia’s bonds have delivered a gain of 0.4 percent this year, trailing returns offered by Victorian, Tasmanian and New South Wales debt, according to a Bank of America Merrill Lynch index

The yield premium over the swap rate on Western Australia’s 5 percent note maturing July 2025 on Thursday climbed by 4.8 basis points to 34.5 basis points, the biggest increase since April 14, according to Commonwealth Bank of Australia prices.

Nahan is forecasting the budget will return to a A$874 million net operating surplus in 2017-18 “as the revenue outlook improves, and the government’s saving and reform measures continue to take hold.”

The budget “has been prepared in the most challenging economic and fiscal environment the state has faced in at least the last three decades,” Nahan said in a copy of his budget speech posted on the government’s website. “Commodity prices have dropped precipitously.”