RPT-Fitch Downgrades South Australia to 'AA'; Outlook Stable
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Sept 27 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded the Long-Term Foreign- and Local-Currency Ratings of the State of South Australia (SA) to 'AA' from 'AA+'. The Outlook is Stable. At the same time, Fitch has affirmed the Short-Term Rating at 'F1+'.
KEY RATING DRIVERS
The downgrade reflects Fitch's view that although SA is beginning to take measures to rebuild its financial position, the state's fiscal and debt positions have deteriorated over the past five years and Fitch does not expect significant recovery for at least three more years.
The government of SA is focussing on limiting expenditure growth through stringent operating efficiencies, while revenue growth is supported by improving state-based taxes and increasing goods and services tax (GST) distributions. SA's share of the GST pool is forecast to decrease to 9.1% in FY14 from 9.4% in FY13. However, the distribution South Australia will receive is expected to increase by AUD142m (3.2%) in FY14 as a result of growth in the national GST pool. Modest growth in operating revenue will enable the state to return to a Fitch-calculated surplus and reduce debt from FY17 onwards. The rating level takes into account SA's contingent liabilities of South Australian Government Financing Authority, whose risk is partly mitigated by its lengthened debt maturity profile and significant liquid assets.
The Stable Outlook reflects Fitch's base case scenario of an improving, albeit still weak, operating and current balance, driven by revenue growth and expenditure restraint. At the same time the base case includes an increase in debt to AUD11bn in FY16 from AUD6.9bn in FY13. Finally, the Outlook factors in deficits in the next three financial years and a return to surplus by FY17. Operating revenue rose by a subdued 2.3% during FY13.This was offset by a 5.3% rise in operating expenditure, which resulted in the operating margin deteriorating to negative 2.79% from 0.13% in FY12. The slow revenue growth is due to the weakness of the national GST pool and softness in the property market and domestic consumption. Operating revenue growth is expected to improve across the forecast to FY17, averaging growth of 5.0% as a result of increases in the national GST pool and state-based taxes. Fitch forecasts stronger growth in the state's operating revenue in FY16 and FY17 in line with growth expectations for the national economy.
Fitch estimates SA's average capital expenditure will fall to AUD1.9bn in FY17 from their historically high levels of an average of AUD2.6bn over the previous four years. Total capex over the period through to FY17 is anticipated to be AUD7.9bn. This includes the recognition of the finance lease liability on the new Royal Adelaide Hospital of AUD2.8bn. Therefore, the average capex over the final three years of the forecast is approximately AUD1bn per annum, without including the hospital. Fitch considers this to be more financially sustainable over the long term, when combined with the announced 10% cut in annual capex programs for each government agency and the improved operating margins as forecasted.
SA's ratings could be downgraded further if the state's operating margin continues to deteriorate over the forecast period to FY17. The state may face additional negative rating pressure if capex increases significantly beyond Fitch's forecast, placing pressure on its debt levels over the medium term. Positive rating action may be taken if the state's fiscal position improves above Fitch's base case scenario. Improvement would be reflected in a positive current balance and reducing debt levels.
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