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

DBRS has today confirmed the Long-Term Debt and Short-Term Debt ratings of the Province of British Columbia (British Columbia or the Province) at AA (high) and R-1 (high), respectively, both with Stable trends. The credit profile continues to be supported by a relatively low debt burden and strong fiscal discipline, leaving the Province with ample flexibility to withstand unforeseen fiscal pressures. DBRS notes that some uncertainty exists regarding tax policy, with a referendum on the future of the recently introduced Harmonized Sales Tax (HST) scheduled for summer 2011, but this is not expected to have a material impact on the Province’s creditworthiness.

British Columbia’s 2011 budget was introduced in February 2011 as a status quo budget prior to the selection of the new premier, Christy Clark. As a result, it was absent any new revenue or spending initiatives and represents a continuation of the fiscal recovery plan brought forward a year earlier. Preliminary results for 2010-11 indicate that the Province recorded a deficit of $1.3 billion. On a DBRS-adjusted basis, this translates into a deficit of $4.7 billion, or 2.3% of GDP, and marks a modest improvement from initial budget projections. Fiscal performance is expected to continue improving in 2011-12, with the deficit forecast to decline to $3.3 billion (DBRS-adjusted), or 1.6% of GDP, as spending is held steady amid decelerating revenue growth. Based on the medium-term plan, the Province anticipates a return to balance by 2013-14 or a deficit of less than 1% of GDP on a DBRS-adjusted basis. Given the size of contingencies built into the plan and the conservative assumptions, there is potential for an even quicker return to balance. This is consistent with DBRS’s expectations at the time of last year’s review and demonstrates the Province’s strong fiscal resolve.

The Province has assumed real GDP growth of 2.0% for 2011 and 2.6% for 2012, which seems prudent compared with the private-sector forecasters followed by DBRS. DBRS notes that the strength of the Canadian dollar and a weak U.S. housing market continue to present downside risks to the outlook, although British Columbia’s use of conservative assumptions leaves room to absorb some unexpected shocks.

As of March 31, 2011, the debt-to-GDP ratio (as measured by DBRS) stood at 19.0%, up mildly from the prior year and the third lowest debt burden of all Canadian provinces. In 2011-12, debt is expected to rise by a further 9.6%, although steady growth in nominal GDP will provide a modest offset, pointing to a debt-to-GDP ratio of 20.0%. Based on the medium-term outlook, debt is expected to continue rising, albeit at a slowing pace, as capital spending slowly declines to more historical levels and the fiscal outlook gradually improves. Provided the economic recovery continues as envisioned, this should keep debt-to-GDP steady at about 20%, slightly below the peak foreseen last year and a level considered very manageable within the current rating.

DBRS notes that a referendum on the HST will be conducted by mail-in ballot starting in June 2011, with the results expected by August 2011, and views the likelihood of the HST being repealed and the provincial sales tax (PST) being reinstated as not insignificant. This could alter the revenue outlook notably from the one presented in the 2011 budget, especially if it requires the repayment of federal transition monies and if tax credits – implemented to lessen the impact of the HST – are left in place. Nonetheless, DBRS believes the government has the flexibility and fiscal discipline to manage either outcome without significantly altering its fiscal outlook.

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.