Moody's Investor Services has confirmed it is keeping a "watching brief" on the progress of Brendon Grylls' plan to deflate Western Australia's debt balloon by inflicting a new tax on the state's two biggest exporters.
On Tuesday Moody's affirmed its Aa2 rating on Western Australia's debt and assessed a stable outlook for a ranking that sits at the bottom end of the state's Australian peer group.
Moody's offered the view that WA's credit quality is "supported by the budgetary flexibility to repair its fiscal performance, forthcoming increases in GST-backed Commonwealth grants – that will eventually offset losses due to own source revenue declines – and some progress in reducing its pace of expenditure growth".
The rating agency's sanguinity may come as a surprise to those magnetised to the short-term debt solution promoted by the state's new National Party leader, Mr Grylls.
The Grylls case for stripping an extra $3 billion a year from the iron ore cash flows of Rio Tinto and BHP Billiton is sustained by the intractability of a state's debt problem that has been triggered by falling commodities prices, the end of a long capital investment boom and a devilish Commonwealth that refused to offer WA its fair share of GST revenues.
No doubt Moody's assesses that the medium-term outlook is difficult, with state deficits likely to average nearly 11 per cent of revenues over the medium term. But from 2018 those deficits will narrow rapidly as GST grants rise and spending increases are curtailed.
Moody's projects that WA's GST grants will "rise on average by a significant 35 per cent over the four years through to 2020".
"Also recent increases in iron ore prices, while not likely to be sustainable, will bolster results in 2016-17. Multi-year wage agreements in line with the policy to limit wages to 1.5 per cent also support better outcomes."
With all of that understood we asked Moody's credit analysts whether the firm had yet formed a view on whether the Grylls grab might alter the state's ratings outlook.
"It has not been approved so it would be somewhat speculative (to consider it). If we were convinced it was something that was going to happen it would be included as a factor," we were advised.
"We are monitoring very closely. In the short term it could have revenue benefits but, on the other hand, it could be damaging to the broader economy," Moody's senior credit officer, Debra Roane, told us.
So it would be fair to say the Moody's has a watching brief on Mr Gryll's proposal?
"Yes, that would be fair. We are watching it closely."
