International ratings agency Moody's has downgraded South Australia's credit rating from Aaa to Aa1, with a stable outlook.
It puts the state's debt rating in line with those of Queensland and the Northern Territory, while the other states maintain their AAA ratings.
Moody's says it made the downgrade based on South Australia's deteriorating financial performance over several years.
"The ratings downgrade reflects the deterioration in the state's financial performance over the last several years as large and recurrent deficits have emerged, reflecting less robust revenue growth, while current expenditures have remained elevated and capital expenditures have reached record highs," the ratings agency noted in its report.
It expects SA's budget deficits to persist, with the state making slow progress towards restoring balanced budgets, despite a promise to get near to a surplus position in 2014/15.
"To meet its targets, South Australia will have to exert resolute controls to counter pressures emanating from health care and wage expectations, which will likely require stronger fiscal resolve," Moody's observed.
"In addition, it may need to intensify its focus on expenditure reductions should its relatively robust revenue assumptions prove unfruitful." Moody's says the persistent deficits have seen the state's debt grow from a moderate 48 per cent of revenues as recently as 2010/11 to a projected 67 per cent this financial year, and as much as 75 per cent by 2015/16.
'Lack of political will' The agency says a ratings upgrade is unlikely in the near term given the deterioration in the state's finances and a lack of political will to implement measures to redress the deficit.
However, a further downgrade is possible if South Australia abandons its plans to reduce its deficit in combination with a further significant weakening in revenues.
SA Opposition treasury spokesman Iain Evans said the ratings agency had pointed the finger at Treasurer Jack Snelling and Premier Jay Weatherill's poor budget management.
"Financial commentators have estimated that losing the AAA credit rating will cost SA over $22 million per year in extra interest payments," he said.
Acting Treasurer Tom Koutsantonis said SA could have achieved a Aaa rating but chose to invest in infrastructure instead.
"This isn't about borrowing debt to pay wages, it's about borrowing debt to build things," he said.
"We are doing the right thing by South Australians, we're making sure we keep this capital infrastructure spending going.
"I think what you're seeing in Queensland, what you're seeing in New South Wales are massive job losses to rein in spending.
They've gone for the option of trying to keep their AAA ratings, we've gone for jobs." Associate Professor John Spoehr from the University of Adelaide said a slowing of economic activity globally was also evident in SA.
"It is a marginal downgrade, the impact of which will be quite minimal really," he said.
"This modest downgrade was expected, so the net impact to the budget may only be in the very low millions, anywhere up to $5 million or so per annum, which is quite small in the scale of a very large budget."