Late today S&P announced that:
Long-Term Rating On South Australia Lowered To ‘AA+’ On Budgetary Pressures, ‘A-1+’ Short-Term Rating Affirmed; Outlook Remains Negative
MELBOURNE (Standard & Poor’s) May 31, 2012–Standard & Poor’s Ratings Services said today that it had lowered its long-term rating to ‘AA+’ from ‘AAA’, on the state of South Australia and the state’s financing arm, South Australian Government Financing Authority. At the same time, we affirmed the ‘A-1+’ short-term rating. The outlooks on the ratings remain negative.
The rating action follows the release today of the South Australian budget for fiscal year ending June 30, 2013, by the state government. The budget now expects accrual operating deficits to occur until fiscal 2016 in the general government and non-financial public sectors (NFPS; the focus of our analysis). As a result, debt levels are higher than previously expected.
Similar to other Australian states, South Australia’s revenues remain under pressure. The state has further lowered its expectation of goods and services tax (GST) transfers from the Commonwealth of Australia (unsolicited rating AAA/Stable/A-1+). Property-related taxes are also low as a result of South Australia’s flat housing market.
“While the state is making progress against the savings targets identified in its fiscal 2012 budget to offset earlier revenue pressures, the 2013 budget predicts even lower revenues,” Standard & Poor’s credit analyst Claire Curtin said. “Moreover, the budget includes new spending initiatives that will only be partially offset by new savings measures. As a result, its budgetary performance is weaker than was expected at the last budget, and we are no longer incorporating into our rating an expected structural improvement in South Australia’s finances.”
We now expect South Australia’s tax-supported debt in the NFPS to peak at 75% in fiscal 2016, which is significantly higher than the 60% peak expected at the mid-year budget review in December 2011. Net financial liabilities (NFLs; which includes both debt and unfunded superannuation) remain at significantly more than the 80%-90% level that we had previously identified as the likely trigger for a downgrade; we forecast it will reach 136% in fiscal 2014. This elevated level of NFLs is partly attributable to a higher discount rate used to value unfunded superannuation obligations. However, higher-than-expected indebtedness from weaker-than-expected operating performance is a material contributor to elevated NFLs.
Ms. Curtin added: “The negative rating outlook reflects our view that there is at least a one-in-three likelihood that we could lower our long-term rating on South Australia further within the next six-to-12 months. Downward pressure remains due to the ongoing budgetary pressure associated with diminished revenues and increased expenditures. The ratings could be lowered if revenue expectations were to be further revised downward, or if there were to be further weakening in the fiscal strategy and delivery of savings measures. ”
The outlook could be revised to stable if the state’s operating balance improves to an average of more than 5% (on a cash basis).
