Bangkok--15 Oct--Standard & Poor's
RATING ACTION
On Oct. 15, 2014, Standard & Poor's Ratings Services revised its ratingoutlook on the Australian State of New South Wales (NSW) to stable fromnegative. At the same time, we affirmed the 'AAA/A-1+' ratings on the state.
RATIONALE
The outlook revision reflects NSW's stronger financial management over recentyears, which we have reassessed to be very strong from strong. This improvedfinancial management, along with higher revenue growth, has boosted thestate's financial performance.
With these developments, we now consider the risk that the government willallow debt levels to exceed 120% of revenues over the forecast period is low,notwithstanding the state's ongoing infrastructure needs. We now expectoperating balances of more than 5% of operating revenues, andafter-capital-expenditure deficits of less than 10% of total revenues, on asustained basis. The state's budgetary flexibility is average, whilecontingent liabilities are low.
The ratings on NSW continue to reflect the extremely predictable andsupportive institutional framework underpinning intergovernmental relations inAustralia, NSW's wealthy and diversified economy, and the state's exceptionalliquidity.
NSW has demonstrated stronger financial management in recent years. Thegovernment has been cutting spending in recent budgets to better alignspending growth with slower revenue growth. Importantly, the government hasexhibited better control of spending relative to targets, which has been
supported by better governance structures. In addition, the government hasdemonstrated willingness to use its balance sheet to help meet pressinginfrastructure needs without solely relying on debt--that is, privatizingexisting assets to raise funds for capital expenditure. The government's focuson efficiency in its businesses appears to be yielding operational savings andalso reducing capital requirements. These improvements are contributing tostronger budget outcomes than we previously anticipated.
A strengthening local economy is also lifting the state's revenue growth.NSW's economy is wealthy, with GDP per capita of US$65,000 in fiscal 2013, andthe outlook for the NSW economy has improved. The state's economic growth haslagged the national average in recent years, as Australia's economic growthhas been mainly driven by mining investment in other regions. But with growthnow likely to rely more on nonmining sectors, and with NSW's highlydiversified economy accounting for about one-third of the national economy, weexpect economic growth to be broadly similar to that of the sovereign incoming years. Moreover, the state's property market has been buoyant,resulting in strong growth in property transaction tax revenue. Commonwealthgrants derived from the goods and services tax (GST) are growing at a higherrate than we earlier expected, due to a pickup in national consumption growth.
Stronger financial management and an improving revenue base both contribute toa lower forecast for the state's debt than previously. The state's debt burdenis still moderate, and likely to rise further due to higher infrastructurespending. But the probability that high infrastructure needs, coupled withslow revenue growth, would lead to a sharp rise in the state's debt burden hasdiminished significantly. We expect the state's strong financial managementwill also help to constrain debt levels.
Nonetheless, budgetary flexibility is moderate. The state's capacity to modifyits revenues is curtailed by the high share of funding that comes fromCommonwealth grants and the significant budget contribution from regulatedutilities.
Liquidity
We consider NSW's liquidity to be exceptional. NSW holds free cash and liquidassets sufficient to fully cover its upcoming 12 months' debt maturities andinterest payments. We expect NSW's liquidity, after we apply haircuts tononcash liquid assets, to average about 180% of debt-servicing costs over theyear to June 30, 2015. We also consider NSW has strong market access,reflecting its demonstrated ability to access deep and liquid capital markets,even in times of stress.
NSW maintains a large portfolio of cash and high-quality liquid assets, with amarket value of A$31.4 billion at June 30, 2014. This is significantly aboveits debt-servicing costs of A$13.9 billion over fiscal 2015. The state doesnot rely on bank facilities as a source of liquidity. The state's liquidity is
managed, and its debt issuance is undertaken by New South Wales Treasury Corp.We consider management to be prudent and conservative. NSW is also lessreliant on short-term funding than some domestic peers, with short-termfunding representing less than 10% of total funding in fiscal 2014.