Queensland credit rating at risk of downgrade, warns Fitch

Fitch Ratings today revised to negative the outlook for Queensland and warned a potential downgrade was likely if it didn't limit the growth of its debt.

The credit ratings agency noted that while the coal-rich state's mining sector was booming and helped the state recover from a series of floods earlier this year, a slow pace of growth continued in its non-mining sectors.

Fitch warned that if the state could not recover to sufficiently positive operating margins over the next 24 months, a cut was likely as a slow budget recovery and a challenging operating environment provided challenges.

"Fitch believes that (Queensland) has limited financial flexibility to counter potential future shocks," said Andrea Jaehne, director of Fitch's international public finance team.

Fitch upheld a long and short-term foreign and local currency rating of AA-plus for Queensland. The spreads on Queensland's debt widened between 2 and 5 basis points following the move, depending on the maturity.

"The move is a bit of a surprise given a lot of the weakness in the outlook is due to temporary factors like the extreme weather,” said Tony Morriss, senior interest rate strategist at ANZ.

"But it comes against the backdrop of a general deterioration in sovereign credit, so the move shouldn't have too much of an impact."

Coal-rich Queensland, which is Australia's only non triple-A rated state, accounts for about 25 per cent of the national economy and is expected to be the biggest state borrower in the current fiscal year, planning to issue some $22 billion in bonds.

December and January flooding washed away vast swathes of the state and hit the economy hard during late 2010 and early 2011 as coal production suffered a major disruption.

Still, investor appetite for the state's debt remains strong as Queensland drew solid response to a $1.5bn issue of 2021 date bonds last week.

Investors in China and Japan, as well as local banks looking to adhere to new global banking standards, have been robust buyers, partly thanks to the higher yield created by the state's lower rating. Following the bond issue, in an interview with Dow Jones Newswires, Queensland Premier Anna Bligh said that getting the state back to triple-A remained a priority.

"The sooner we can get back to a triple-A rating the better," she said.

Author | Source | Geoffrey Rogow | Dow Jones Newswires | July 27th