This report does not constitute a rating action.
MELBOURNE (S&P Global Ratings) May 9, 2024--The State of Western Australia's economy marches on, and so do its operating surpluses. Business investment and commodity prices underpin Western Australia's strong economic performance, resulting in fiscal metrics that are stronger than nearly all domestic and global peers.
Very strong fiscal outcomes and modest debt levels support the 'AAA' credit rating we have on Western Australia, which is highest of all Australian states and territories. In its budget handed down today, the government estimates that state domestic demand grew a strong 5.25% in real terms in fiscal 2024 (year ending June 30).
An uptick in infrastructure spending may weigh slightly on budgetary performance. The state estimates that infrastructure spending grew 15%, in nominal terms, in fiscal 2024, resulting in a small fiscal cash deficit. This is contrary to our previous expectations of a small cash surplus at the nonfinancial public sector level.
While today's budget slightly revised down Western Australia's strong operating margins, we believe there is substantial upside to these forecasts. Iron ore, Western Australia's most important commodity royalty earner, is currently fetching about US$115 per tonne--much more than the US$75 per tonne the government expects it average next year. Stronger royalties would more than offset the government's modest cost-of-living package, housing investment, and increased capital expenditure budget.
This upside is likely to limit growth in Western Australia's debt. The budget flags a modest increase of about A$5.5 billion in gross debt, at the nonfinancial public sector level, to A$55 billion (or 72% of operating revenues) by 2028. If iron ore prices remain around US$115 per tonne gross debt could plateau or even fall to well below the A$49 billion (or 68% of operating revenues) the government expects it to be by June 30, 2024.
The state's robust financial management, very high-income economy, and exceptional liquidity also support the rating. These strengths help counterbalance risks associated with the state's dependence on the resources sector.
Related Research
- State of Western Australia, Feb. 5, 2024
- Institutional Framework Assessment: Australian States And Territories' Strong Fiscal Autonomy Is Double-, March 6, 2024
- Subnational Debt 2024: Australian States' Debt Rift Deepens, Feb. 28, 2024
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