Ratings agency downgrades WA's outlook

RATINGS agency Standard & Poor's (S&P) has revised downwards its outlook for the West Australian economy from stable to negative.

S&P credit analyst Claire Curtin said there was a one-in-three chance of WA's ratings being downgraded in the next two years from its current AAA standing.

S&P said the revision reflected the expectation that the state's balance sheet may weaken as a result of lower mining royalties, which would take some time to be reflected in its share of GST revenues.

WA's budget had become increasingly reliant on the royalties, which were currently volatile as commodity prices fluctuated.

"We consider that WA's increased budgetary reliance on royalties and the strong rises in its expense base, combined with the time-lag in GST relativity adjustments that offset reductions in own-source revenues, may pose challenges for WA's budgetary performance in the short-to-medium term," Ms Curtin said.

"Our outlook assumes that royalty revenues will be lower-than-budgeted across the forward estimates, due to our lower price and higher foreign exchange assumptions than those contained in the WA budget."

S&P noted that the WA government had unveiled several rounds of efficiencies and cost-savings measures in response to a reduction in the state's share of GST and lower mining royalty revenues.

"With the exchange rate and iron ore prices not having developed this fiscal year in line with the budget, further measures are likely to be announced in the coming months, as the government strives to deliver a surplus in fiscal 2013," S&P said.

Treasurer Troy Buswell recently flagged further cost cutting in December's Mid Year Economic Review.

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