DBRS Confirms Province of Saskatchewan at AA and R-1 (high)

DBRS has today confirmed the Long-Term Debt and Short-Term Debt ratings of the Province of Saskatchewan (Saskatchewan or the Province) at AA and R-1 (high), respectively. The trends are Stable. The confirmation reflects Saskatchewan’s very manageable debt burden, disciplined management and generally sound fiscal results, even through the recent economic downturn. While considerable uncertainty remains with respect to global economic conditions, DBRS believes that the Province is well-positioned to withstand a prolonged period of slow economic growth, should it materialize, without causing undue erosion to its financial profile.

Through the use of a larger-than-expected draw on its Growth and Financial Security Fund (GFSF), Saskatchewan recorded a surplus of $425 million in 2009-10. This translates into a deficit of $813 million, or 1.5% of GDP on a DBRS basis, after making adjustments to (1) exclude transfers from the GFSF; (2) include expected growth in pension liabilities not expensed by the Province; and (3) recognize capital expenditures on a cash basis, rather than as amortized. The performance was weaker-than-expected largely due to a rapid decline in natural resource revenues, but was nonetheless one of the smallest shortfalls among Canadian provinces. The Province has budgeted for a $20 million surplus for the current fiscal year, which points to a DBRS-adjusted deficit of $812 million, or 1.4% of GDP. Total revenue growth is expected to keep pace with spending, owing to a recovery in natural resource royalties and only modest spending increases, primarily for health. Over the medium term, the Province’s fiscal plan points to gradually declining deficits of $750 million to $300 million on a DBRS-adjusted basis between 2011-12 and 2013-14, as economic conditions slowly improve. However, DBRS notes that fiscal results will continue to be highly influenced by natural resource prices and production levels.

Saskatchewan’s DBRS-adjusted debt grew by 4.0% in 2009-10 primarily due to unfunded pension liabilities as drawdowns from the GFSF were used to fund operating cash requirements. Along with the debt increase, a notable decline in nominal GDP further amplified the impact on the Province’s debt-to-GDP ratio, which rose to 18.8% from 15.8% in 2008-09. Nonetheless, this remains the third lowest debt burden among Canadian provinces. Further growth in unfunded pension liabilities is expected to lead to an increase in debt in 2010-11, although continued draws from the GFSF and a rebound in economic activity should result in a relatively stable debt-to-GDP ratio at 19.0% before starting to decline thereafter.

Saskatchewan’s economy was significantly affected by commodity market volatility in 2009, as real GDP fell by 6.3%. This contraction was even larger than the one experienced in the early 1990s and has been heavily influenced by a significant decline in potash sales and slower activity in the oil and gas sector. Fortunately, the future looks brighter for the Province due to improving commodity prices and the expectation for increased global demand. The budget assumes real GDP growth of 2.6% in 2010, notably below the consensus forecast of 3.4% although the impact of flooding earlier this year on agricultural production has yet to be fully quantified and is likely to dampen growth prospects. In 2011, the consensus points to growth of 3.7%, and while DBRS notes that downside risks remain heightened by global economic conditions, Saskatchewan is nonetheless expected to be one of the growth leaders among Canadian provinces. The financial flexibility accumulated in recent years through prudent fiscal management and meaningful debt reduction should allow the Province to withstand a bumpy recovery. However, continued emphasis on spending discipline and careful management of revenue volatility will be essential to ensure that the credit profile remains sound.

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.