Iron-ore's plunge has put Western Australia state's credit rating under pressure, but that's not likely to imperil Australia's AAA rating just yet, analysts said.
"Undoubtedly, Australia's fiscal position has weakened over the past year, and the May Budget will almost certainly reveal upward revisions to forecast budget deficits, and consequently government debt," analysts at ANZ said in a note Thursday. But it added, "Despite the deterioration in the fiscal outlook, current forecasts suggest that net government debt is unlikely to hit levels that could threaten Australia's sovereign credit rating."
The country's outlook has taken a big hit from declines in the prices of key commodity exports, particularly iron ore, as demand from China wanes.
Iron-ore prices are down more than 50 percent over the past year, with the April contract Nymex iron ore 62 percent FE CRF China trading at $49.30 a tonne Thursday, compared with around $108.50 12 months ago.
The metal's outlook isn't likely to find much support from data Thursday showing China's manufacturing activity fell to a one-year low in April. The flash HSBC Purchasing Managers' Index was at 49.2, below expectations and down from March's 49.6. A figure below 50 signals contraction.
That's already led S&P to put Western Australia state's rating on Credit Watch negative, indicating a rating change could soon be in the offing.
"Slumping iron ore prices will considerably reduce the state's mining royalties, and without corrective actions by the state, we forecast that its operating position will sustain deficits for the foreseeable future," S&P said earlier this month. It forecast the average debt burden would rise to 114 percent of operating revenue in fiscal 2018.
The state had around 6.03 billion Australian dollars ($4.67 billion) of mining royalties in 2014, but that could fall to around 2.69 billion Australian dollars this year, S&P estimated.
Sturdy sovereign rating
But even if S&P cuts Western Australia's rating, that may not affect the country's sovereign rating.
"Rating agencies have been sanguine about Australia's fiscal standing," ANZ noted. While S&P has suggested Australia's AAA could be at risk if net general government debt rises above 30 percent of gross domestic product (GDP), that's not likely, it said.
If iron ore prices fall to around $35 a tonne -- a level Treasurer Joe Hockey has warned could become the government's official forecast -- that would wipe 21.8 billion Australian dollars from central government revenue, ANZ estimated, although it added it doesn't expect iron ore prices to head quite that low.
"Even with this deterioration, net general government debt does not breach – or even get close to – S&P's 30 percent 'line.' In fact, based on these numbers, we look for general government debt to peak at just below 24 percent of GDP in 2016-17," ANZ said.
LNG, consumption to support
Moody's also said earlier this month that Australia's Aaa is still well supported, citing 2014 GDP growth of 2.7 percent.
"The modest slowdown we expect in China could lower Australia's resource related investment and mining exports, but liquefied natural gas (LNG) exports will still grow and, coupled with consumption growth will keep Australia's GDP growth above 2 percent for the next two years," Moody's said.
But it also warned about rising levels of government debt.
"If fiscal deterioration is not reversed through policy action, as we expect it to, it could pose sovereign credit risks," Moody's said.
--Li Anne Wong contributed to this article.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1