About time, from Moody’s:

Moody’s Investors Service has today downgraded the long-term issuer and senior unsecured debt ratings of the Western Australian Treasury Corporation (WATC) — backed by the State of Western Australia — to Aa2 from Aa1 and changed the outlook to stable from negative. Moody’s also downgraded the Euro Medium Term Note Programme to (P)Aa2 from (P)Aa1. At the same time, Moody’s affirmed the Prime-1 ratings on WATC’s commercial paper program/ST issuer rating. RATINGS RATIONALE The ratings downgrade reflects the ongoing deterioration in Western Australia’s financial and debt metrics and an increasing risk that the state’s debt burden will be higher than indicated in its FY2015/16 midyear report. The drop in the price of iron ore and the sluggish performance in state taxes have led to declines in revenue, and, absent corresponding expenditure measures, budget deficits are widening significantly. As a result, the state’s debt burden is rising to a level that is higher than that of its peers. Western Australia’s reliance on volatile royalty income to fund a sharp rise in current expenditures in recent years has exacerbated the impact of falling iron ore and oil prices on its budget outcomes. The decline in royalties — they now comprise a lower 14.8% of revenues down from a peak of 21.6% in FY2013/14 — and lack of financial cushions against adverse movements in commodity prices and exchange rates, is leading to a significant widening in deficits. According to the state’s mid-year report, the revenue declines due to falling royalties along with the weaker performance in payroll and other taxes, are projected to result in a deficit equal to a high 16.2% of revenues in FY2015/16, and above the 13.8% budgeted. Similarly, the state projects in its mid-year report that over the next four years its average deficit will double to 9.5% of revenues, up from 4.3% forecast in the budget. Moreover, its budgeted goal of moving into a surplus position equal to 5.1% of revenues in FY2018/19 is not likely to be met and is now projected at a smaller 1.2%. Furthermore, Moody’s believes that unless the government strengthens its commitment to budget improvements there is a risk that deficits forecast in the mid-year report will be exceeded. This is because the state’s assumed average rate of spending growth of 2.7% annually over the next four years — down from 5.7% rate registered on average over the last four years — will require very low increases in public-sector employee costs and a concerted reduction in the growth rate of spending on healthcare and other social services, which could prove difficult. In particular, a reform of the healthcare system is proceeding at a more gradual pace than anticipated. The larger deficits will drive further increases in the state’s debt burden — already at a high 102.3% of revenues in FY2014/15, up from a moderate 44.4% in FY2007/08 — to a projected 128.9% in FY2015/16. Over the medium term, projected cumulative consolidated government cash deficits could push the debt burden up to around 140% of revenues by FY2016/17, which is higher than other Australian states. Western Australia’s subdued economic outlook — the 1.5% real economic growth forecast by the state for FY2015/16 is well below the 5.3% average compound growth rate achieved over the past decade — will constrain growth in tax revenues. The state’s expectations that rising production and exports would in part fill the void left by the completion of large iron ore and LNG projects are being dampened by the slowdown in China. Also falling commodity prices and slowing growth in China will reduce business investment, a key driver of the state’s economy. A stable outlook has been assigned to the ratings because of the support provided by Australia’s institutional framework to states and territories, and, expectations that Western Australia’s policy response will strengthen if its fiscal performance deteriorates well beyond what is projected. Principally, GST-backed Commonwealth grants — distributed in accordance with an equalization formula — will help to cushion a weakening in Western Australia’s relative economic performance in relation to the other states. In addition, the state retains ample budgetary flexibility, with the ability to raise tax rates or reprioritize its high levels of capital expenditures. Moreover, we believe that in the event of further significant deterioration in the state’s fiscal performance the state would fortify steps to constrain spending as indicated by budget measures implemented in recent years to slow the growth in public sector employee costs. The state is also planning a series of asset sales that — while one-off in nature — could ease the expected accumulation in debt. What Could Change the Rating — Up/Down A further significant widening in deficits that could occur due to further revenue weakness, without a stronger policy response — leading to a more rapid debt accumulation and significantly higher debt burden then currently projected — would place downward pressure on the rating. Furthermore, the ongoing weakness in commodity prices will continue to weigh on the state’s credit profile and will limit headroom within the rating. A rebound in revenue growth — along with a more effective budgetary redress plan to make structural improvements to the state’s budget, resulting in narrower deficits and an easing in the debt burden — could lead to upward pressure on the ratings.

Let me remind you that the WA midyear report is now a full six weeks old. In short, Moody’s is downgrading WA for lying about its prospects.

Alas for the sinking western state, the Moody’s dictum of greater fiscal austerity or the negative watch will resume will, of course, only make the economy worse given such will be very pro-cyclical. Let us remind ourselves once more of Naked Emperor Barnett’s royal stuff up:

Where does one begin? At the top I suppose. State final demand has zero chance of being in the positive for the next two years:

Unemployment is already at 6.53% in trend terms – the highest reading since January 2002 – and is not in any danger of flattening out to meet the Budget forecast of 6.5%:

Then there’s wages growth in Western Australia, which came in at just 1.98% in the year to September 2015 – already below the new outlook as well and declining:

The iron ore price is already trading well below $46 and 2016/17’s $42 should be $30 and 2017-19 should be $20. Somehow Treasury has also contrived to raise its volumes outlook, even though they are going to fall sharply. At least the exchange rate is also too high offering some insurance.

Then we come to the population growth outlook of 1.5% which is also above where it is today at 1.4% and not exactly trending as desired:

Then there are the sectoral outlooks:

Household consumption is expected to rebound:

In 2014-15, growth in household consumption moderated to 1.1%, below forecast growth of 1.5% at Budget. Excluding the GFC period, this was the lowest rate of growth in 25 years and well below national growth of 2.5%. Discretionary spending6 has been particularly weak, detracting from consumption growth for the second consecutive year. The larger than expected moderation in consumer spending in 2014-15, combined with a more moderate outlook both across the broader domestic economy and for population growth, has flowed through to lower forecast growth in household consumption across the forward estimates period. Household consumption is expected to increase by 1.5% in 2015-16 (down from 2.75% at Budget), before lifting gradually across the forward estimates to reach 3% by 2018-19 (see figure below). This is consistent with a slower anticipated recovery in domestic economic activity and labour market conditions. Consumption per person, having fallen in 2014-15 (the first fall since the GFC), is expected to gradually recover across the forecast period.

Dwelling investment to stay at a permanently high plateau:

Following strong growth of 11.7% in 2013-14, total dwelling investment moderated to 4.1% in 2014-15 (slightly above the Budget forecast of 3.25%). The pace of growth in new dwelling construction slowed over the year and expenditure on ‘alterations and additions’ contracted for the fourth consecutive year. In 2015-16, total dwelling investment is forecast to increase by a modest 2.25% (marginally higher than the 2% forecast at Budget). Although the pace of new dwelling construction is slowing, the level of expenditure required to move the current stock of dwellings under construction (the third highest level on record in the June quarter 2015) to completion is expected to support slightly higher growth in 2015-16 than previously forecast. In 2016-17 and 2017-18, total dwelling investment is projected to decline more sharply than forecast at Budget. While it is anticipated that a gradual recovery in expenditure on ‘alterations and additions’ will provide some support for activity, this is expected to be insufficient to offset the stronger than projected declines in new dwelling investment. This reflects a softer outlook for key drivers of new housing demand since Budget, including population, employment and wage growth. This weakening of housing demand has already begun to flow through the building pipeline, with completions outpacing commencements (in the June quarter 2015) for the first time in three years and the number of building approvals declining by 5.8% in the 12 months to October 2015.

Here is the history of housing starts:

Tell me that they are going to fall just 6% in the next two years then grow again. They are going to halve! It is already happening:

Business investment is expected to gently fall away like snow flakes before rebounding strongly:

Business investment fell by 12.3% in 2014-15. This is a larger decline than the 10.5% fall estimated at Budget. It is also the second consecutive contraction in investment since it peaked at a record level of $78.7 billion in 2012-13. Business investment is expected to continue to fall at a faster rate across the forecast period, reflecting a more subdued outlook for both resources and non-resources investment since Budget. Investment is projected to decline by 12.5% in 2015-16 before falling by an average of around 10% per annum across the forward estimates, double the average fall of 5% per annum at Budget (see figure below). The revised profile reflects the absence of major new resource project commitments since Budget. In addition, changes in the expected wind down of the remaining capital expenditure on LNG projects has contributed to a larger fall in 2016-17 than previously expected. Declines in both commodity prices (particularly iron ore and oil prices) and exploration expenditure have also reduced the likelihood of prospective resource projects emerging over the forecast period. Weaker domestic economic activity (including softer growth in consumer spending) has weighed on the outlook for non-resources investment across the forecast period. This is consistent with further annual average falls in building activity and approvals since Budget, and a rise in the central business district office vacancy rate (to 19.6% in the September quarter 20159 ). The latest Westpac – CCI Survey of Business Expectations shows that anticipated investment expenditure remained at record low levels in the September quarter 2015, with 44% of businesses planning to reduce their investment expenditure over the next 12 months. The revised forecasts imply that the value of investment will fall to around 13% of forecast GSP by 2018-19. While this is down from the long-run average share of around 16% forecast at Budget, it remains above the long-term share for the period up to 2004-05 of around 11%. Overall, the level of investment in Western Australia is expected to fall from $62.5 billion in 2014-15 to around $39.8 billion by 2018-19 (its lowest level since 2006-07), a total decline of around $23 billion (or 36%).

$40 billion in 2018/19 is pure fantasy. It will be half of that. There is nothing to take up from collapsing mining:

Nearly all of the assumptions in the Emperor Barnett’s Budget were debunked as it was published. It deserved a credit downgrade for the pure, fantastical ineptitude of it. Good job Moody’s!