DBRS Confirms New Brunswick at A (high) and R-1 (middle)

DBRS has today confirmed the Long- and Short-Term Debt ratings of the Province of New Brunswick (New Brunswick or the Province) at A (high) and R-1 (middle), respectively. The trend on both ratings remains Stable, reflective of the Province’s below average debt burden and its relatively resilient economy. However, New Brunswick’s fiscal position continues to weaken as a result of an aggressive tax reduction plan and still sizeable capital program, which is placing upward pressure on debt. While improving global economic conditions should be supportive of the Province’s slow path to recovery, DBRS notes that limited flexibility will likely be left within the rating by the time fiscal balance is restored.

A second year of fiscal stimulus is expected to lead to another weak performance in 2010-11 with the Province’s budget pointing to a DBRS-adjusted deficit of $1.2 billion, or 4.2% of GDP. Revenue growth will be constrained to less than 2% as the Province continues forward with the second year of its four-year tax reform plan. Total spending, however, is forecast to increase by 4.7% as a result of rising health-care costs and a record high capital program. New Brunswick now aims to return to balance by 2014-15, two years later than originally planned. This slower recovery plan is viewed as concerning by DBRS as the fiscal targets will be challenging to meet, especially as they assume two years of zero public sector wage increases and no tax increase. The upcoming provincial election also adds an element of uncertainty to the fiscal plan which could result in a notably different recovery plan at the next provincial budget.

After exhibiting above average economic performance in 2009, New Brunswick is expected to post modest real growth of 1.7% in 2010. This appears somewhat conservative in relation to the private sector consensus, which has been improving of late. A rebound in capital investment intentions will support construction while stronger commodity prices and global economic conditions will help revive demand for provincial exports. Nonetheless, the strong Canadian dollar and still uncertain U.S. economic momentum could require greater efforts on the expenditure side to achieve fiscal targets and ensure the credit profile remains intact.

The debt-to-GDP ratio is expected to have reached 30.9% at March 31, 2010, up from 28.7% a year ago. Based on the weak fiscal outlook, DBRS projects the debt-to-GDP ratio to continue rising to 35.9% in 2010-11 and reach a peak in 2013-14 of 40%. This constitutes considerable erosion from the fiscal plan presented last year which pointed to a peak debt-to-GDP ratio of around 35% in 2012-13. DBRS views the current plan as manageable but notes that there is limited flexibility remaining should the Province deviate from the plan or the economic recovery fail to materialize as envisioned.

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.