DBRS Confirms the Province of Alberta at AAA and R-1 (high)

DBRS has today confirmed the Long- and Short-Term Debt ratings of the Province of Alberta (Alberta or the Province) at AAA and R-1 (high), respectively. The trend on both ratings is Stable. The Province stands to benefit from a recovery in the energy sector and financial markets but will nonetheless need to tighten spending discipline to ensure the continuation of sound fiscal results. Alberta’s low, though rising, debt burden, and strong liquidity position – thanks mainly to its large Sustainability Fund – continue to support the ratings and leave the Province well-positioned to withstand a potentially prolonged period of soft economic growth and weaker energy prices.

After reporting stronger-than-expected results in 2009-10, Alberta is budgeting for a deficit of $4.7 billion in the current fiscal year. On a DBRS-adjusted basis (after recognizing capital expenditures on a pay-as-you-go basis, rather than as amortized) this translates into a shortfall of $6.3 billion, or 2.4% of GDP. Total revenues are forecast to fall by 4.7%, largely as a result of lower investment income following the solid recovery in 2009-10. The expected increase in natural resource revenues is likely to only provide a partial offset. Driven by rising health-care costs, total spending is forecast to grow by 3.0%. Alberta has increased base operating grants for its consolidated health authority while at the same time entering into a five-year agreement aimed at achieving cost certainty – an ambitious goal. Notwithstanding the challenges in health care, Alberta has made progress at reducing program spending across several other ministries. Over the medium term, the budget points to further DBRS-adjusted deficits of $3.1 billion and $1.5 billion in 2011-12 and 2012-13, respectively. While this represents one of the more favourable outlooks among Canadian provinces, DBRS notes that it will be highly dependent on the direction of commodity prices and the Province’s success in controlling spending.

According to Statistics Canada, Alberta experienced its worst recession since at least the early eighties in 2009 as real GDP contracted by 4.5%. For 2010, the budget assumes a modest recovery in real GDP growth of 2.6%, which remains reasonably below the private sector consensus as tracked by DBRS. Improving oil prices and further revisions to the Province’s royalty regime have helped boost private sector investment, which should be supportive of growth. The private sector consensus points to real GDP growth of 3.5% in 2011, which would once again position Alberta as one of the growth leaders among provinces. However, DBRS cautions that considerable risks remain, including the uncertain pace of recovery in the United States and global commodity prices.

In 2010-11, Alberta’s debt-to-GDP ratio, as measured by DBRS, is expected to rise to 5.0%, up from 4.2% in 2009-10. This represents by far the lowest debt burden among all provinces and remains very manageable within the current ratings. Capital investments and loans made by Alberta Capital Finance Authority, along with growing unfunded pension liabilities, will be the primary contributors to rising debt. Additional financing needs will be met with a drawdown in the Sustainability Fund, which is expected to end the year at $8.2 billion, down from $15.0 billion at March 31, 2010. Based on the medium-term plan, debt is expected to peak in 2011-12 at around 5.3%, provided the economic recovery continues and the Province makes steady progress toward reducing its fiscal imbalance.

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.