DBRS Changes Province of Nova Scotia’s Trends to Stable

DBRS has today changed the trend on Nova Scotia’s (Nova Scotia or the Province) Long- and Short-Term Debt to Stable from Positive where it had been placed on October 1, 2008. At the same time, the ratings have been confirmed at “A” and R-1 (low), respectively. The four-year fiscal plan of the new government marks a notable deviation from the previous intention to return to a balanced budget by 2010-11 and points to greater erosion in the Province’s financial profile than originally expected by DBRS, even though the downturn experienced by Nova Scotia was relatively mild in relation to other provinces. DBRS stated in its last review that it planned to reassess the Positive trend following the development of a complete budget and a full review of the fiscal strategy of the newly elected government. While the Province enjoys significant flexibility within its current rating, DBRS believes the slower plan to restore fiscal balance and further debt accumulation amidst the still uncertain global economic environment have materially reduced the positive momentum in Nova Scotia’s credit profile and no longer support the Positive trend.

Based on recently updated results, the Province reported a deficit of $330 million in 2009-10, which translates into a DBRS-adjusted shortfall of $697 million, or 2.1% of GDP. This was somewhat better than expected and still one of the best performances among Canadian provinces, reflective of a mild downturn in Nova Scotia. However, the government’s fiscal plan presented in April 2010 points to softening fiscal resolve. A shortfall of $222 million is budgeted for the current fiscal year, a notable deviation from the previously communicated plan to return to balance in one year. On a DBRS-adjusted basis, this points to a deficit of $1.0 billion, or 2.9% of GDP. Total revenues are forecast to grow by 3.2%, supported by the Province’s decision to raise the sales tax by 2.0 percentage points, effective July 1, 2010. The introduction of a fifth tax bracket for high income families and higher petroleum royalties will also contribute to revenue growth. Total spending is budgeted to grow faster than revenues largely as a result of additional outlays for health and debt-servicing costs.

Nova Scotia now plans to return to balance by 2013-14, with DBRS-adjusted deficits slowly declining to $20 million by the end of the forecast horizon. DBRS notes that achieving these targets will be largely dependent on the Province’s success in implementing its back-loaded expenditure management program, which requires large savings in the final two years of the plan. For 2010, the Province has assumed a modest economic recovery with real growth forecast at 1.9%, followed by 1.2% growth in 2011. Similarly, the Province anticipates below-average growth over the medium term. These assumptions appear conservative in relation to the private sector consensus, although DBRS notes that downside risks remain related to the pace and strength of the global economic recovery and the impact of a strong Canadian dollar on international exports.

Provincial debt grew by $1.3 billion in 2009-10, driven by the fiscal imbalance, growth in unfunded pension liabilities and the needs of Crown corporations. This pushed the debt-to-GDP ratio to 40.7% from 36.5% one year earlier. A similar result is expected in 2010-11, which would boost the debt-to-GDP ratio to 42.0%, incorporating provincial measures to reduce unfunded pension liabilities, a development viewed favourably by DBRS. Nonetheless, the Province retains considerable flexibility within its rating, thanks in part to meaningful liquidity on hand and a concerted effort to reduce the debt burden from the early 2000s to 2007-08, leaving it well-positioned to withstand a slower-than-expected recovery.

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.