DBRS Confirms Province of British Columbia at AA (high); Recovery Plan on Track

DBRS has today confirmed the Long- and Short-Term Debt ratings of the Province of British Columbia (British Columbia or the Province) at AA (high) and R-1 (high), respectively. The trend on both ratings remains Stable as the Province’s fiscal recovery plan remains relatively unchanged from last year, supported by prudent spending discipline, a low debt burden and expectations for a continued economic recovery.

The fiscal outlook points to a DBRS-adjusted deficit of $5.2 billion in 2010-11 or 2.7% of GDP. After falling for two consecutive years, total revenues are forecast to grow by 6.1% owing to improving tax receipts and natural resource revenues. Due to a reallocation of HST transition funding from 2009-10 to 2010-11 and 2011-12, federal transfers will also be markedly higher in the next two years. However, total spending is expected to grow notably driven by additional outlays for health and an accelerated capital program aimed at supporting economic growth. Spending targets assume no net increase in public sector compensation, which DBRS views as ambitious. Based on the medium-term plan, deficits of $945 million and $145 million are expected in the two following fiscal years before a return to balance in 2013-14. DBRS notes that the Province has prudently assumed a larger forecast allowance in light of still-significant economic uncertainty which, if not needed, could allow for a return to balance one year earlier than planned. On a DBRS-adjusted basis (including tax-supported capital spending on a pay-as-you-go basis rather than as amortized by the Province), this translates into deficits equivalent to 1% of GDP or less.

Supported by past years of sound fiscal results and debt reduction, British Columbia maintains one of the lowest debt burdens among all provinces, estimated at 18.2% of GDP as of March 31, 2010. Although this represents an increase from 15.8% in 2008-09, it is nonetheless a modest deterioration in relation to most other Canadian provinces. A sizeable capital spending program and further, though shrinking, fiscal deficits will push the Province’s debt burden towards 20.0% of GDP in 2010-11 and a peak of around 21% in 2011-12 before resuming a gradual downward trend.

After experiencing a contraction in real GDP of 2.3% in 2009, British Columbia’s economy is expected to gradually recover with real growth of 2.2% assumed by the Province for 2010. This appears to be somewhat conservative when compared with the private sector consensus, as tracked by DBRS, of 3.4% which has been improving of late. For 2011, the budget assumes growth of 2.3% as considerable downside risks remain regarding the fragile economic recovery and the impact of a strong Canadian dollar. Nonetheless, DBRS takes comfort in the Province’s superior fiscal management and ability to deliver upon its plan which contributes to the stability of the 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.