DBRS Confirms the Province of Newfoundland and Labrador at “A” and R-1 (low)

DBRS has today confirmed the Long- and Short-Term Debt ratings of the Province of Newfoundland and Labrador (Newfoundland or the Province) at “A” and R-1 (low), respectively. The trend on both ratings is Stable. Significantly lower revenues along with increased pension expenses will negatively impact the Province’s fiscal performance this year, putting an end to four consecutive years of surpluses. However, the fiscal discipline demonstrated in recent years, strong liquidity position and efforts to reduce debt continue to provide solid support to the credit profile.

For 2009-10, the budget points to a DBRS-adjusted deficit of $1.0 billion, following a larger-than-expected surplus of $2.3 billion in 2008-09. Total revenues are expected to fall considerably from the previous year due to the impact of lower commodity prices on royalty revenues and the absence of 2005 Atlantic Accord proceeds, the balance of which were recognized in 2008-09 as a result of the Province no longer being an equalization recipient. At the same time, spending for key health and education programs will continue to grow at a solid pace, with a large portion of the spending increase used to address the latest round of public sector labour agreements. In an effort to provide some fiscal stimulus, gross capital expenditures are budgeted to hit a historical peak of almost $1.1 billion, well above the prior five-year average of $400 million.

Based on preliminary results, debt-to-GDP fell for the seventh consecutive year to 28.9% in 2008-09 from 30.7% the year prior. This represents a lower debt burden than what was expected at DBRS’s last review, and constitutes a sharp improvement from the peak of 83% reached in the mid-1990s, although this trend will temporarily reverse through the current recession. For 2009-10, debt is expected to rise by 2.0%, pointing to a debt-to-GDP ratio of about 41% according to provincial estimates. However, the latest private sector GDP forecasts suggest the deterioration in this ratio may be much less pronounced than budgeted, with leverage possibly remaining below 35% of GDP. In 2009, the private sector forecast points to a decline in real GDP of 2.5% compared to a conservative 7.7% contraction assumed in the budget. Forestry and mining production have been impacted by the downturn in commodity prices while oil production will fall due to the depletion of reserves at existing oil fields. However, large capital projects such as the Long Harbour nickel processing facility and White Rose oilfield expansion will help cushion the impact of the economic downturn.

While not insignificant, Newfoundland’s current fiscal pressures are viewed as temporary by DBRS, and not an indication of softening fiscal discipline. The budget projects a quick return to balance by 2011-12, provided commodity prices rebound and large investment projects gain momentum. As such, financial metrics should return to a range supportive of the credit profile. Should the recovery take longer to materialize and revenues fail to rebound as notably as anticipated, DBRS would expect the Province to exercise spending restraint to curb growth in debt as has been the case in the recent past.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.