DBRS Confirms Province of Nova Scotia at “A”: Trend Remains Positive

DBRS has today confirmed the Long- and Short-Term Debt ratings of the Province of Nova Scotia (Nova Scotia or the Province) at “A” and R-1 (low). The trend on both ratings remains Positive. The improvement experienced in Nova Scotia’s credit profile over the last several years appears to have lost momentum as a result of the recession and uncertainty remains as to how the newly-elected government will approach the Province’s fiscal challenges. At the time of DBRS’s last review, the trend on both the Long- and Short-Term Debt ratings was changed to Positive based on the expectation of continued improvements in the debt burden and sustained prudence in fiscal management. While the September budget does not live up to those expectations, DBRS views the current fiscal plan as a transitional one since the fiscal year was already half over when it was introduced by the new administration. As such, DBRS will reassess the Positive trend following the presentation of next year’s medium-term fiscal plan.

Following several consecutive years of sound fiscal results and prudent budgeting practices, the Province is expected to post a sizeable deficit in 2009-10, estimated at $592 million. On a DBRS-adjusted basis, this translates into a $1.1 billion deficit, equivalent to 3.2% of GDP – a somewhat more favourable outlook than most other provinces. Total revenues are forecast to be relatively unchanged as falling natural gas royalties from the offshore sector will be offset by higher one-time federal transfers. Spending however, will increase markedly (12.5%), led by higher allocations for health and education and a sizeable capital program. The Province hopes to restore its fiscal balance by 2010-11 although this is still likely to result in a DBRS-adjusted deficit nearing 2% of GDP provided targets are met. Nova Scotia is expected to fare better than most provinces in 2009 with the consensus forecast pointing to a contraction in real GDP of 0.8%. After which, the private sector is forecasting a modest rebound, to 1.9% growth for 2010.

In 2008-09, Nova Scotia’s debt-to-GDP ratio ended the year at 36.5%, up from 35.3% the prior year, driven primarily by higher unfunded pension liabilities. In 2009-10, the debt-to-GDP ratio is expected to rise back above 40%, a level not seen since 2004-05, as a result of weaker fiscal results and significant borrowing to fund capital needs.

Provided a gradual economic recovery ensues and the Province can substantially meet all of its fiscal targets allowing for a restoration of the downward trend in its debt-to-GDP ratio, positive rating action could be contemplated by DBRS at the next annual review. However, failure to address the fiscal deficit in a prudent and timely manner, thus removing the flexibility accumulated over the last few years, would likely result in a restoration of the Stable trend.

This confirmation also relates to debt guaranteed by the Province including Nova Scotia Municipal Finance Corporation and debt series AH, AJ, AK, AM & AN issued by Nova Scotia Power Finance Corporation.

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.