DBRS Upgrades Province of Saskatchewan to AA and R-1 (high), Trend Stable

DBRS has today upgraded the Long-Term Debt and Short-Term Debt ratings of the Province of Saskatchewan (the Province) to AA and R-1 (high), respectively, from AA (low) and R-1 (middle). The trend on both ratings is now Stable. Supporting the upgrade are the significant reductions in debt achieved over the last three years, continued fiscal prudence and relatively sound economic fundamentals that have led to a much-improved credit profile. Despite significant economic headwinds facing the provinces, Saskatchewan has so far shown resilience and built up considerable flexibility that leaves it poised to withstand the downturn with only limited damages to its fiscal and financial position – a favourable outlook in relation to the sizeable deficits and debt growth experienced in the early 1990s.

After several years of solid results, the fiscal situation is expected to be more challenging in the current year. Nonetheless, Saskatchewan remains in a better position than most other provinces, with the 2009 updated fiscal forecast pointing to a DBRS-adjusted deficit of $912 million, or 1.5% of GDP, more than twice the $361 million shortfall anticipated at the time of the March budget. Since budget, revenue projections have been pared back as potash prices and production are now forecast to be notably below budget assumptions. Oil royalties should provide a partial offset, however, and a decision to defer a portion of the capital budget will help limit the deterioration in fiscal results. Total spending is now projected to fall by 1% from the prior year, compared with a 1% increase at the time of the budget.

Saskatchewan made significant strides toward debt reduction in 2008-09, including a $1.0 billion contribution from the Growth and Financial Security Fund (GFSF) mid-year. At March 31, 2009, DBRS-adjusted debt had been reduced by 19.1% from the prior year, leaving the debt-to-GDP ratio at 15.7%. This improvement was much better than expected by DBRS and represents the second lowest debt burden among provinces. Growing unfunded pension liabilities and declining nominal GDP will push the debt-to-GDP ratio back above 17% in 2009-10, but this is a small setback in relation to the debt growth occurring in most other provinces.

Following strong real growth of 4.4% in 2008, Saskatchewan is expected to remain one of the top performers in 2009, although it will not avoid a contraction, with the private sector forecasting a 0.7% decline in real GDP. In light of weak global demand, softening commodity prices have slowed the pace of economic activity in the Province yet at the same time are providing some needed relief in the resource and construction sectors. For 2010, the private sector consensus points to growth of 2.8%, which would again be the best among provinces. Provided fiscal discipline continues, improving fiscal results and a declining debt-to-GDP ratio should resume once the economic recovery is underway.

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.