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SUB-SOVEREIGN

CREDIT OPINION28 August 2017

Update

RATINGS

Treasury Corporation of VictoriaDomicile Australia

Long Term Rating Aaa

Type LT Issuer Rating

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Kristin S Tan 612-9270-1413Associate [email protected]

John Manning +612 9270 8145VP-Sr Credit [email protected]

David Rubinoff 44-20-7772-1398MD-Sub [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Victoria, (State of)Update to credit analysis

SummaryMoody's assigns long-term debt and issuer ratings of Aaa to the Treasury Corporationof Victoria (TCV)1, the entity that issues debt on behalf of the State of Victoria and itsgovernment-owned corporations. TCV's debt is guaranteed by the State of Victoria and therating reflects the state's credit quality.

TCV's credit quality reflects the state's ample financial flexibility, healthy operating surpluses,as well as its diverse economy. The state is forecasting a modest fiscal surplus for the generalgovernment sector in the four years to fiscal 20212, which reflects strong revenue growth andthe government's budgetary redress measures, focused on reducing growth rates in currentexpenditures.

We note that spending growth in fiscal 2018 is forecast to rise in excess of revenues, whichif not contained over the medium term, would lead to a weakening in financial performance.Although the state's debt burden remains manageable, its continued commitment toprudent fiscal practices is required to maintain the stable outlook.

Victoria's Aaa rating is well placed when compared to most Australian states and territories,whose ratings range from Aa2 to Aaa, reflecting their strong financial metrics.

Exhibit 1

Healthy operating surpluses while narrowing, provide ample financial cushionAs of 30 June

0

1

2

3

4

5

6

7

8

9

10

2011 2012 2013 2014 2015 2016 2017E 2018B 2019F 2020F 2021F

Actuals and fiscal 2018 budget Fiscal 2017 budget

Gro

ss O

per

atin

g Bal

ance

as %

of Rev

enues

Sources: State of Victoria fiscal 2011-2016 Financial Reports; Fiscal 2017 and 2018 Budgets; Moody's Investors Service

Credit strengths

» Well-established institutional framework provides fiscal flexibility

» Healthy economic growth

» Manageable debt burden

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» Positive fiscal results reflect strong revenue growth

Credit challenges

» Rising expenditures risk to fiscal outcomes

» Lower operating balance reduces buffer to fund infrastructure investment

Rating outlookThe outlook is stable.

Factors that could lead to a downgradeA loosening in the government's resolve to maintain the budget balance and the associated increased debt could result in downwardpressure on the rating.

Key indicators

Exhibit 2

Key Indicators for the State of Victoria

(As at June 30) 2013 2014 2015 2016 2017E 2018B

Net Direct and Indirect Debt/Revenues (%) 61.8 63.9 61.6 59.5 n/a n/a

Net Direct and Indirect Debt/Gross State Product (%) 8.9 9.7 9.2 9.0 n/a n/a

Cash Financing Surplus (Requirement)/Revenues (%) -6.7 0.2 -0.5 0.1 n/a -8.4

Gross Operating Balance/Revenues (%) 5.3 8.3 6.8 9.1 6.6 6.2

Interest Payments/Revenues (%) 3.7 4.1 3.9 3.7 3.3 3.4

Intergovernmental Transfers/Revenues (%) 45.1 48.0 45.6 44.8 45.3 47.0

Real Gross State Product growth (% change) 1.1 0.8 2.6 3.3 3.0 2.8

Sources: State of Victoria Financial Reports fiscal 2013-2016; State of Victoria fiscal 2018 budget; Moody's Investors Service

Detailed rating considerationsVictoria's rating combines (1) a baseline credit assessment (BCA) of aaa, and (2) a high likelihood of extraordinary support coming fromCommonwealth government in the event that the entity faced acute liquidity stress.

Baseline credit assessmentWell-established institutional framework provides fiscal flexibilityArrangements with the Commonwealth Government of Australia (the Commonwealth, Aaa, stable) equip Australian states with policyflexibility over own-source revenues3 and discretion over expenditure, providing them with the tools to respond to adverse budgetarydevelopments. The states can adjust own-source revenues without restraint (although subject to state political considerations) and alsohave the capacity to lower rates of current and capital spending, if required.

The strong financial support provided by the Commonwealth through fiscal transfers to all states is also a key factor in Victoria'sratings, with total grants contributing to over 45% of its budget. A significant portion of untied grants in the form of Goods andServices-backed taxes (GST) are distributed according to the Horizontal Equalization Formula (HEF) which seeks to reduce revenue-raising and cost disparities between jurisdictions. Additionally, conditional grants are provided to the states under periodic agreements.The state also benefits from Commonwealth grants for major infrastructure projects.

Strong economic growthVictoria has the second largest economy in Australia, with a diverse economy that provides ample support for its financial obligations.The state has benefitted from the nationwide shift away from mining, and sectors such as higher education, tourism, construction andhousing investment have benefitted from a low Australian dollar and supportive interest rate environment. Given the significant rises in

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 28 August 2017 Victoria, (State of): Update to credit analysis


housing prices in recent years, a sharp slowdown in housing activity remains a downside risk to the state's economic outlook, althoughthis is not our central scenario.

Over the next four years to fiscal 2021, we expect that the state's population growth will increase at just under 2.0% annually – abovethe national population growth rate – spurred by domestic and international net migration. This will allow the state to mitigate issuesassociated with an aging population, such as increased cost pressures on the healthcare system, but will also place further demand onthe state's infrastructure and provision of services.

Exhibit 3

Victoria's economy is diversifiedAs of June 30Industry Gross Value Added as % of Total Gross Value Added

Exhibit 4

Population growth in Victoria expected to outpace national growthAs at 30 June

0.0% 2.0% 4.0% 6.0% 8.0%10.0%12.0%14.0%16.0%

Financial, insurance & real estate

Education & training; health care &…Wholesale & Retail Trade

Ownership of dwellings

Transport, postal, warehousing, info…Professional, scientific & technical…

Manufacturing

Admin, support, public admin & safety…Construction

Arts & recreation and other services

Agriculture, forestry & fishing

Accommodation & food services

Electricity, gas, water & waste services

Mining

2016 2007

Sources: Australian Bureau of Statistics; Moody's Investors Service

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2014 2015 2016 2017E 2018B 2019F 2020F

Victoria Australia

Source: Australian Bureau of Statistics; Victoria fiscal 2018 budget; Government of Australiafiscal 2018 budget; Moody's Investors Service

The state forecasts that its economy will grow by 2.8% annually from fiscal 2018-21, close to the projected average national growthrate of 3.0%. This reflects the state's expectations of robust growth in household consumption, which is supported by strong labourforce figures, higher household wealth and a growing population, as well as private investment and exports.

We expect that the positive economic trends will also be reflected in employment, which is forecast to rise by 2.0% in fiscal 2018,before moderating slightly to 1.5% over the forward estimates to fiscal 2021. Meanwhile, the state projects that unemployment rateswill remain steady at 5.5% on average over the budget and forward estimates4, slightly below the national unemployment rate.

Manageable debt burden

Victoria's debt burden5 is manageable, and compares favorably to its peers. We estimate that the state's net direct and indirect debt6

will ease to around 58% of revenues in fiscal 2018 from nearly 60% in fiscal 2016, due to cash proceeds from the sale of the 50-yearlease of the Port of Melbourne. However, these long-term lease proceeds are earmarked for capital expenditures and we forecast thatdebt could increase to just over 60% of revenues by fiscal 2021, or 8.9% of GSP, which we regard as manageable within the state'srating.



Exhibit 5

Victoria's debt burden is moderate compared to its peers

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2011 2012 2013 2014 2015 2016 2017E 2018B 2019F 2020F 2021F

New South Wales Victoria Queensland Western Australia South Australia Tasmania Northern Territory

Net

direct

and indirect

debt as

% o

f re

venues

Source: States' Departments of Treasury and Finance; Moody's Investors Service

The state's liquidity position is favorable with financial assets of AUD12.0 billion7, which provide an ample cushion for the state's debtobligations and are more than sufficient to cover total annual cash requirements, particularly given that the latter will be reduced bythe proceeds from the sale of the Port of Melbourne. Substantial financial assets held by TCV are conservatively invested in stronglyrated, liquid securities.

Victoria's consolidated unfunded superannuation liability will register at 38.7% of general government revenues in fiscal 20188, whichis in the mid-range compared to other Australian states/territories. Trends in liabilities can fluctuate significantly from year-to-yeardue to changes in the discount rate used in their calculation, although we think that any concerns related to the size of superannuationliabilities are mitigated by the closure of the defined benefit schemes in 1993.

Positive fiscal results underpinned by strong revenue growthWe expect the state's financial performance to remain strong over the budget and forward estimates, as revenues increase by 3.7% perannum over the four years to fiscal 2021. The state's own-source revenue base is diversified, with payroll taxes, conveyancing dutiesand land taxes forecast to increase on the back of a robust housing market and economic growth. The diversification of its revenue baseprovides the state with a measure of revenue flexibility, given its ability to adjust own-source revenues to mitigate any downside risksto Commonwealth grants.

Population growth and an improvement in the state's relativity has resulted in larger receipts of Goods and Services Tax (GST)-backedgrants from the Commonwealth, now forecast to grow by 7.2% on average over the budget and forward estimates, above the fiscal2017 budget's growth projections of 6.1%9. However, we note that risks related to lower growth in the size of the national GST pooland increases in the relativities of other states will impact on the state's future GST receipts, although Victoria's broader revenue basewill somewhat mitigate this.

We anticipate that the state's gross operating balance (GOB) as a percentage of revenues will average a healthy 7.7% between fiscal2018-21, supported by higher revenues. This provides the state with an ample financial cushion to absorb unsustained revenue shocks,as well as some increases in recurrent expenditure. However, we note that the size of this buffer has narrowed when compared to thefiscal 2017 budget projections, due higher levels of spending, particularly in fiscal 2018 and 2019.



Exhibit 6

Victoria's revenue base is diversified although Commonwealthgrants make up a significant portion

Exhibit 7

GOB provides sufficient financial buffer, albeit narrowing

GST grants23%

Other grants24%

Payroll taxes9%

Land taxes4%

Conveyancing duties10%

Other taxes12%

Sales of goods and services11%

Other Revenue7%

Based on fiscal 2018 budget.Sources: State of Victoria fiscal 2018 budget; Moody's Investors Service

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2017 2018 2019 2020 2021

Fiscal 2017 budget Fiscal 2018 budget

Source: State of Victoria fiscal 2017 and 2018 budgets; Moody's Investors Service

On a net lending/borrowing basis, we estimate that Victoria's fiscal surplus will average 2.1% over the budget and forward estimates,lower than the 2.9% average surplus anticipated in the previous budget. The fiscal surplus forecast includes non-cash transfers ofinfrastructure assets to VicTrack, which are netted off from general government capital expenditures. When these non-cash transfersare excluded, we estimate that the state would record an average deficit of 4.0% from fiscal 2018 to 2021.

Rising expenditures risk to fiscal outcomesThe state projects that operating spending in the fiscal 2018 budget will rise by 3.2% annually between fiscal 2018 to 2021, belowthe average revenue growth rate of 3.7% over the same period. However, we note that these forecasts are contingent on low rates ofgrowth in fiscal 2020 and 2021 of 1.5% and 2.9% respectively, which we think will be challenging to achieve given the higher rates ofspending growth in fiscal 2018 and 2019 (just under 4.5% on average for both years).

We expect that the growth in operating expenditure will be largely driven by higher employee costs, projected by the state to rise byaround 3.5% on average from fiscal 2018 to 202110. Additionally, the state has ramped up the levels of capital spending, totaling nearlyAUD41 billion on a consolidated level11, over the next four years to invest in infrastructure.

To the extent that the increases in operating and capital expenditure grow above expectations, we anticipate that the state's GOB willnarrow further. This in turn will place pressure on its GOB, although we note that the state retains a significant amount of flexibility toadjust spending to maintain its margins if deemed necessary.

Lower operating balances reduce buffer to fund large capital investmentsWe note that the narrower GOB as a result of higher spending (when compared to fiscal 2017 projections) poses a risk to the Victoria'sexpectations of achieving a surplus in fiscal 2019. Additionally, the state has forecast that its debt burden will rise to around 60% ofrevenues by fiscal 2021, to fund its capital program12. An unanticipated rise in capital spending could lead to greater debt accumulationbeyond the state's current projections, given the lower buffers offered by the state's smaller forecast GOB.

Extraordinary support considerationsWe assign a high likelihood of extraordinary support from the Commonwealth government of Australia (Aaa, stable), reflecting ourassessment of the incentive provided by the risk to the Commonwealth government's reputation if Victoria were to face acute liquiditystress, as well as indications of support stemming from the strong system of Commonwealth-State transfers.

Output of the baseline credit assessment scorecardIn the case of Victoria, the BCA matrix generates an estimated BCA of aa1, close to the BCA of aaa assigned by the rating committee.



The matrix-generated BCA of aa1 reflects (1) an idiosyncratic risk score of 2 (presented below) on a 1 to 9 scale, where 1 representsthe strongest relative credit quality and 9 the weakest; and (2) a systemic risk score of Aaa, as reflected in the Australian Governmentrating (Aaa, stable).

Rating methodology and scorecard factors

Exhibit 8

(State of) VictoriaAs of 30 June 2016

Baseline Credit Assessment Score Value Sub-factor Weighting Sub-factor Total Factor Weighting Total

Scorecard

Factor 1: Economic Fundamentals

Economic strength 7 88.34 70% 5.2 20% 1.04

Economic volatility 1 30%

Factor 2: Institutional Framework

Legislative background 1 50% 1 20% 0.20

Financial flexibility 1 50%

Factor 3: Financial Performance and Debt Profile

Gross operating balance / operating revenues (%) 3 8.33 12.5% 2.75 30% 0.83

Interest payments / operating revenues (%) 5 3.81 12.5%

Liquidity 1 25%

Net direct and indirect debt / operating revenues (%) 3 59.50 25%

Short-term direct debt / total direct debt (%) 3 11.10 25%

Factor 4: Governance and Management - MAX

Risk controls and financial management 1 1 30% 0.30

Investment and debt management 1

Transparency and disclosure 1

Idiosyncratic Risk Assessment 2.37(2)

Systemic Risk Assessment Aaa

Suggested BCA aa1

Source: Moody's Investors Service

Ratings

Exhibit 9Category Moody's RatingTREASURY CORPORATION OF VICTORIA

Outlook StableBkd Issuer Rating AaaBkd Senior Secured -Dom Curr AaaBkd Senior Unsecured AaaCommercial Paper P-1

Source: Moody's Investors Service



Endnotes1 All debt is issued through TCV, and on-lent to the general government and public corporations. In addition, TCV borrows to pre-finance large upcoming

maturities and to maintain a presence in diverse capital markets.

2 Year ending 30 June 2021.

3 Including payroll taxes, property-related conveyancing duties, gambling taxes, motor vehicle taxes and other income

4 Fiscal 2018 to 2021.

5 All debt is issued through the state's Treasury Corporation, TCV, and on-lent to the general government and public corporations. In addition, TCV borrowsto pre-finance large upcoming maturities and to maintain a presence in diverse capital markets. Debt issued for these purposes is offset by substantialfinancial assets held in liquid investments, providing an ample cushion for these debt obligations (these amounts are not netted off Moody's debt ratios).

6 In line with Moody's internationally comparable debt ratios, “net direct and indirect debt” subtracts the debt of self-supporting public corporations. Thepositive performance and self-supporting nature of the state's water corporations - given they levy tariffs on their customers - therefore eases the state'sdebt burden.

7 Beginning of fiscal 2018.

8 The state has a targeted goal of achieving full funding by 2035.

9 From fiscal 2017 to 2020.

10 A significant portion of this growth will be focused in fiscal 2018 and 2019, the result of state measures to increase healthy services and police numbers,investments in the government's family violence pakacge, as well as higher grants to VicTrack, non-government schools and local governments.

11 General government and non-financial public sector.

12 Including AUD10.9 billion Melbourne Metro Tunnel, its share of costs for the AUD5.5 billion West Gate Tunnel Project and AUD6 billion to remove raillevel crossings.



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REPORT NUMBER 1076205


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Contacts

Kristin S Tan 612-9270-1413Associate [email protected]

John Manning +612 9270 8145VP-Sr Credit [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


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