DBRS Confirms Province of Prince Edward Island at A (low) and R-1 (low)

DBRS has today confirmed the Long- and Short-Term Debt ratings for the Province of Prince Edward Island (the Province or PEI) at A (low) and R-1 (low), respectively. The trend on both ratings remains Stable. PEI’s credit profile benefits from a resilient economy that has helped to soften the impact of the current downturn. Yet despite cost-containment efforts, a growing deficit, boosted by fiscal stimulus, will contribute to debt growth over the years to come, slowly eroding PEI’s financial flexibility.

While all provinces are facing significant fiscal challenges in the current economic environment, PEI is the only one that has yet to communicate a clear plan to deal with its deficit. Preliminary results point to a worse-than-expected DBRS-adjusted deficit (after recognizing capital expenditures as incurred rather than as amortized) of $91.1 million in 2008-09, or 1.9% of GDP, owing to higher capital and pension expenses. For 2009-10, a DBRS-adjusted deficit of $171.5 million, or 3.6% of GDP, is anticipated, based on rising program and capital expenditures that are only partially offset by higher federal transfers, an event unlikely to continue in subsequent years given the federal government’s weaker fiscal position.

Having entered the downturn in a somewhat weaker fiscal position than most other provinces, PEI has less room to manoeuvre, which explains the large shortfall contemplated for the year. As a result, debt is expected to grow by $237 million, or 15%, in 2009-10, fuelled in part by the debt needs of Crown corporations. This will push the debt-to-GDP ratio to 39% in 2009-10, up from 34% in 2008-09 and the highest level in six years.

PEI’s relatively small, but stable, economy produced above-average real growth of 0.9% in 2008, owing to a mix of industries that has proven less susceptible to the global economic recession than has been the case in larger provinces. At the time of the budget, the Province expected to escape the downturn with real growth of 0.5% in 2009, but the outlook has since weakened, with the private sector consensus now pointing to a 1.3% contraction in real GDP. While this remains notably better than the Canadian provincial average and helps reduce the strain on the Province’s finances, DBRS believes that the risk of a slower-than-expected recovery is not insignificant. This emphasizes the need for PEI to develop a clear plan to tackle its fiscal imbalance and prevent undue erosion in its credit profile.

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.