Fitch: Institutional Framework for Australian Subnationals Remains Strong

Sun May 25, 2014 6:30pm EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Institutional Framework for Australian Subnationals here SYDNEY, May 25 (Fitch) Fitch Ratings says in a newly-published report that the overall strength of the Australian institutional framework remains a major positive credit factor for subnationals. The positive factors of the framework focus on substantial disclosure, horizontal fiscal equalisation, transparency of information and sophisticated borrowing vehicles. Fitch considers this level of disclosure and transparency to be optimal and compares favourably with international peers. Despite the Commonwealth government being under no obligation to assist the states in the event of financial difficulties, Fitch believes that the government is likely to provide extraordinary support to the states. States report a full accruals-based balance sheet, income statement, cash flow, along with multi year forecasts that set out revenue, expenditure and debt projections which are updated continuously. The reporting of financials is in line with IFRS, with all budgetary and financial information being readily and promptly available. There is solid horizontal fiscal equalisation between the stronger states and those with weaker socio-economic profiles which benefit from both a greater share of the Goods and Services Tax (GST) distributions and specific Commonwealth grants. Each state has a sophisticated borrowing vehicle that allows it to benefit from relatively inexpensive funding from capital markets and gain economies of scale. Specialised borrowing vehicles give the states, public sector entities and some local government's greater access to markets, financial sophistication and experience in debt-management practices. The report also highlights some weaknesses including a vertical fiscal imbalance. The states have considerable responsibilities, including the delivery of healthcare and education. However, the states' ability to tax is limited. State taxes are low and inherently difficult to increase. About 45% of state revenue comes from the Commonwealth through GST distributions and specific grants. States have limited ability to raise revenue to compensate for unexpected rises in expenditure. The states also have large contingent liabilities as they guarantee the treasury vehicles in each individual state. This can include the debt of public sector entities (PSEs) and local governments, depending on the specific state. The treasury vehicles are active issuers in the local and international capital markets. Finally, there is a lack of prudential regulation whereby the Australian loan council exists to coordinate borrowing between the Commonwealth and the states, but it has no power to limit debt. Control or borrowing levels are determined through capital market scrutiny rather than through established Commonwealth limits. The special report, entitled 'Institutional Framework for Australian Subnationals' is one in a series of Fitch's reports examining the institutional frameworks for subnationals in various countries which are available on the agency's website at www.fitchratings.com. Contacts: Matthew Wright Director +61 2 8256 0323 Fitch Australia Pty. Ltd., Level 15, 77 King Street, Sydney NSW 2000 Fernando Mayorga Managing Director +34 93 323 8407 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0325, Email: Leni.Vu@fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'Local and Regional Governments Rating Criteria', dated 23 April 2014, are available on www.fitchratings.com. Applicable Criteria and Related Research: Fitch: Australia's Institutional Framework Continues to Support Subnationals here Tax-Supported Rating Criteria here International Local and Regional Governments Rating Criteria - Outside the United States here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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