Mining capex and GST review driving WA recovery
Western Australia (WA)’s economy is continuing an upward trajectory, with increased mining revenues and a favourable reallocation of goods and services tax (GST) among the main drivers of fiscal improvement. The state is now forecasting a fiscal surplus in 2019/20, one year earlier than expected.
The state’s bottom line suffered when the mining and construction boom ended in 2012. After an extended period of negative or negligible economic growth and simultaneous budget repair, the mining industry is once again driving the state’s recovery – though the latest capex wave will not reach the peaks of the last boom.
At a presentation to dealers and investors in Sydney on 17 January, Michael Barnes, WA’s under treasurer and chairman of Western Australian Treasury Corporation (WATC), explained that a recent spate of project approvals – principally in iron ore and lithium mining – is driving investment, jobs and revenue.
Lithium and iron-ore projects, as well as stage two of Chevron’s behemoth Gorgon LNG project, are expected to bring an estimated A$17.1 billion (US$12.2 billion) in capex to the WA economy.
“Employment growth has rebounded strongly since its trough in early 2017 and the amount of full-time employment that has been generated by these projects has been particularly pleasing,” says Barnes.
While iron ore is still the dominant mineral in WA’s economy – according to Barnes it accounts for 90 per cent of the state government’s mining royalties – the state is placing great hopes in its potential to become a powerhouse in the export of lithium as global demand for battery-storage technology heats up.
WA already accounts for 41 per cent of the world’s lithium production and aims to increase that share to 50 per cent over the next three years, based on a pipeline of projects from the Pilbara in the north of the state to the Goldfields and South West. WA’s lithium production in 2017/18 was A$1.6 billion and is expected to more than double by production volume by 2021/22 (see chart 1).
Furthermore, in contrast to WA’s iron-ore boom, projects are in the pipeline to allow WA to be a processer of lithium as well as a miner and exporter. While the industry is still relatively small, this may give the state more insulation to the kind of commodity-price swings which have determined its fortunes in the past.
Barnes says: “We have lithium all over the state and want to establish WA as a world leader in battery minerals.”
Source: Department of Mines, Industry Regulation and Safety, Western Australian Treasury 18 January 2019
He identifies Chinese demand for electric vehicles as one of the main drivers of growth and adds that Chinese demand for WA’s exports has continued to be strong amid the negative atmospherics created by the US-China trade war.
“What is often missed in the talk of tariffs on Chinese steel exports is that 92 per cent of its steel production is consumed domestically. This is important for WA because it means the part of the value chain which the state benefits from is largely unaffected by the tariffs,” says Barnes.
Exports have taken an increasingly important role in WA’s economy, with a yawning gap between gross state product (GSP) and state final demand growing since 2012. Barnes says however, that as the state’s economy improves the domestic economy is expected to overtake exports as the state’s main source of growth.
GST has long been a sticking point for WA’s politicians and public, with the state receiving as little as 30 per cent of its GST contribution even as its economy struggled. But with changes to the way GST is distributed passing through the Federal parliament late in 2018 there is some long-awaited relief en route.
An effective 70 per cent GST floor to be implemented from the 2019/20 financial year is forecast to grant WA A$2.4 billion in top-up payments from the Federal government, so that its GST returns meet the 70 per cent threshold (see chart 2). These top-up payments are to be solely allocated to debt reduction.
Barnes explains that even if mining royalties soar in the future, which has in the past led to a decreasing share of GST, WA will be entitled to top-up payments from the Federal government which ensure it receives 70 per cent of its contribution.
Source: Western Australian Treasury Corporation 18 January 2019
The revision to GST distribution was a key reason for S&P Global Ratings revising its outlook for WA’s AA+ rating to stable from negative in October 2018.
The bottom line
GST relief and the strong performance of the state’s mining sector, as well as meaningful reductions to the state’s expense growth, have WA’s economy well positioned, with public sector net debt and net debt as a share of GSP set to decline over the forward estimates.
General government revenue has been revised up by A$3.3 billion since the 2018/19 budget.
The result of the state’s budget improvement is a lower forecast borrowing requirement, according to outgoing WATC chief executive John Collins. WATC’s new-money requirement for 2018/19 was revised to A$1.4 billion from A$2.7 billion at the mid-year budget review.
Collins says: “Plans are still in place to introduce a new floating-rate note, likely to be with a 2024 maturity and possibly to introduce a long-dated line, with client demand currently suggesting a 2029 maturity. However, the upside in revenue could affect these plans.”
The state does still face some challenges and drags in its economy. The Perth housing market and WA’s wage growth and population growth are still lagging long-term averages. The two former categories at least are now national, rather than WA-specific phenomena.
Consumer sentiment is on the way up though, at the end of 2018 reaching its highest point since 2013. WA also has a household net-saving ratio of more than triple the national average, suggesting the state’s consumers are well-positioned to increase their role in the economy, according to Barnes.
Furthermore, incoming WATC chief executive, Kaylene Gulich, says the potential privatisations Landgate and TAB are not factored into budget forecasts, but will provide further health to the state budget should they be finalised.