Ratings agency S&P Global says the upgrade from AA+ reflects WA's "continued budgetary outperformance" compared with other jurisdictions.
The state is forecast to bank a $5.7 billion surplus this financial year, just shy of the previous year's record.
Much of the windfall is driven by royalty revenues which have surged due to a strong iron ore price.
WA has also filled its coffers under a GST deal legislated by the previous federal government which ensures the state receives at least 70 cents for every dollar it contributes.
"The state of Western Australia's budgetary performance is superior to that of most peers," S&P Global said on Monday.
"(It is) supported by elevated commodity prices, a favourable distribution of federal grants, solid operating expense control, and growing tax receipts from a rebounding economy."
S&P Global expects the iron ore price will continue to outperform the deliberately conservative assumptions underpinning WA's budgetary forecasts.
But it noted the government faced pressure to lift wages for public servants with the inflation rate in Perth rising to 7.6 per cent.
The agency praised the McGowan government for its track record of "robust cost control", noting the state was paying down debt while recording large surpluses.
It predicted the government would struggle to deliver its entire infrastructure program, headlined by the massive Metronet rail network.
"Delivering this enlarged pipeline will be a challenge because governments across Australia are simultaneously endeavouring to ramp up their own infrastructure programs, and there are limits on industry capacity, materials, and skilled migration," S&P Global said.
"Our forecasts for the next three years assume Western Australia will under-deliver on its capital budget."
WA was stripped of its AAA credit rating in 2013 under Colin Barnett's Liberal government.
Premier Mark McGowan, who is in Rome for meetings with tourism and trade partners, said the upgrade highlighted WA's status as a safe investment destination.
"WA's financial reputation has been restored after five years of hard work to repair the state's finances," he said in a statement.
"Our state's reputation took a battering under the previous Liberal National government, which was responsible for multiple credit rating downgrades due to poor financial management.
"Almost a decade on, I'm pleased that my government has helped our finances turn a corner and we are back to where we should be - the state's finances in surplus and a AAA credit rating."
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