DBRS Confirms the Province of Alberta at AAA and R-1 (high)

DBRS has today confirmed the Long- and Short-Term Debt ratings of the Province of Alberta (Alberta or the Province) at AAA and R-1 (high), respectively. The trend on both ratings remains Stable. Against the current economic backdrop, DBRS believes that Alberta’s financial management will be tested, as revenues are expected to fall significantly due to soft energy prices while spending demands continue to mount this year. Nonetheless, the ratings remain supported by a very low, though rising, debt burden and strong liquidity position – thanks mainly to the Province’s large Sustainability Fund – that leave it well-positioned to weather the downturn. Alberta also stands to benefit from the considerable potential in its energy industry when economic conditions recover.

Following the Province’s first deficit in fifteen years in 2008-09, a further DBRS-adjusted deficit of $7.0 billion (2.7% of GDP) is forecast for 2009-10. Declining natural resource revenues resulting from weak oil and gas prices are the primary cause for the deteriorating fiscal outlook. DBRS expects the Province to paint an even weaker fiscal picture than budgeted if current natural gas prices are sustained. Through the first four months of the fiscal year, oil prices have remained somewhat above the US$55.50 per barrel price assumed in the budget, although natural gas royalties will place a significant drag on revenues, with prices averaging $3.20/GJ year to date compared with $5.50/GJ assumed in the budget. To provide some relief, Alberta aims to keep spending growth contained to less than 1%, which, if achieved, will be a notable accomplishment in light of the almost 12% average increase recorded over the last five years.

Alberta is expected to be one of Canada’s weaker economic performers this year as activity in the oil and gas industry and the construction sector has cooled dramatically. The private sector consensus calls for a 2.5% contraction in real growth in 2009, somewhat weaker than the 2.0% decline assumed in the budget. Recent modifications to the resource royalty regime may have tempered the investment climate in Alberta and could dampen a pick-up in the energy industry when prices recover. Based on the private sector consensus, a return to real growth of 2.4% is forecast for next year, although DBRS believes this may be somewhat optimistic and, like the outlook for many other provinces, subject to downward revision. Even with such a recovery, however, the fiscal outlook points to deficits in excess of 2% of GDP over the medium term. As such, closing the fiscal imbalance will require new revenue measures or sizeable spending cuts.

In 2008-09, considerable erosion was experienced in the assets of the Alberta Heritage Savings Trust Fund, which combined with growing unfunded pension liabilities to return the Province to a DBRS-adjusted net debt position for the first time in five years, estimated at $5.6 billion or 1.9% of GDP at March 31, 2009. While investment returns are expected to improve in the current year, unfunded pension liabilities are likely to continue growing and new borrowing will be needed for Alberta’s large capital program and Crown corporations. However, a large drawdown from the $18.3 billion Sustainability Fund should help offset some of the financing needs, containing the debt-to-GDP ratio to a still-low 3.6% in 2009-10. This marks a significant turnaround from the net creditor position of prior years but still represents by far the lowest debt burden of all provinces. Based on the medium-term plan, debt is likely to rise, approaching close to 5% of GDP by 2011-12. Nonetheless, this should remain manageable, assuming a recovery begins to take hold later this year and the Province remains committed to tackling its fiscal imbalance.

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.