DBRS Confirms Province of Prince Edward Island at A (low) and R-1 (low)

DBRS has today confirmed the long- and short-term debt ratings of the Province of Prince Edward Island (PEI or the Province) at A (low) and R-1 (low), respectively. The trend on both ratings remains Stable. PEI continues to benefit from a resilient economy but is nonetheless experiencing fiscal challenges that, if left unresolved, will continue to slowly erode its credit profile. A second year of fiscal stimulus and only gradual economic recovery will result in a sizeable deficit and additional debt needs, thus limiting PEI’s financial flexibility.

Based on its recently released Public Accounts, the Province recorded a sizeable deficit of $74 million in 2009-10. On a DBRS-adjusted basis (after recognizing capital expenditures as incurred rather than as amortized), this translates into a shortfall of $166 million, or 3.5% of GDP, in 2009-10. This represents the second largest deficit (in relation to GDP) among Canadian provinces despite the Province having experienced only a relatively mild economic slowdown. For 2010-11, the Province is budgeting for a shortfall of $55 million. On a DBRS-adjusted basis, this translates into a deficit of $143 million, or 2.9% of GDP. As no tax changes are planned and federal transfers remain flat, PEI will be dependent on improving economic conditions and spending restraint to help shrink its fiscal deficit. The Province now plans to return to balance by 2013-14, although DBRS believes that this could be challenging to achieve given the uncertain direction of federal transfers, potential for a faltering economic recovery and the need to realize further cost savings.

As a result of the marked fiscal erosion in 2009-10, PEI’s debt-to-GDP ratio rose to 38.9%, up from 35.0% the prior year. Another year of significant capital spending and a continued fiscal shortfall will boost debt by $150 million, or 8.1%, in 2010-11. This points to a debt-to-GDP ratio of 40.4%, potentially leaving PEI with the third highest debt burden among provincial peers. While DBRS views this debt burden as manageable, it nonetheless reduces PEI’s ability to withstand further erosion in its financial profile.

PEI benefited from the relatively insulated nature of its island economy in 2009 and posted only a slight decline of 0.1% in real GDP. This was the second-best result among provinces in 2009, a noteworthy performance for the small economy. For 2010, however, the budget assumes only a modest increase of 1.9% in real GDP, somewhat below the current private sector consensus. As provincial and federal stimulus measures gradually wind down, growth is also expected to remain below average in 2011. Continued strength in the Canadian dollar, along with the uncertain pace of U.S. economic recovery, is likely to pose a challenge for provincial exports and the tourism sector. This heightens the need for PEI to further develop a clear and credible fiscal recovery plan. DBRS believes that additional spending restraint or new revenue measures may be required to prevent further erosion in the credit profile should the economic recovery lose momentum.

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.