DBRS Confirms the Province of New Brunswick at A (high) and R-1 (middle)

DBRS has today confirmed the long- and short-term ratings of the Province of New Brunswick (New Brunswick or the Province) at A (high) and R-1 (middle), respectively, both with Stable trends. New Brunswick remains challenged by weak fiscal results although a resilient, but slow growing, economy and manageable debt burden provide support to the credit profile. DBRS notes that the 2011 budget introduced by the recently elected Progressive Conservative government shows some improvement in the fiscal outlook and maintains the commitment to restore fiscal balance by 2014-15, however specific fiscal targets beyond 2011-12 and the measures required to achieve them are still forthcoming and will likely involve considerable spending restraint if financial flexibility is to be preserved.

For 2011-12, the Province is budgeting for a deficit of $449 million, a modest improvement from what had been anticipated in the prior year’s fiscal plan. On a DBRS-adjusted basis, this translates into a shortfall of $630 million, or 2.1% of GDP, down from a deficit of $1.2 billion the prior year. Total revenues are projected to increase by 2.1%, as a number of tax measures will help boost own-source revenues, partially offset by a decline in federal transfers. Following the election of a new government in September 2010, Premier Alward had indicated his intentions to discontinue some of the previously planned tax cuts and raise certain other taxes – measures which have been implemented in the current budget. Total expenditures are budgeted to decline by 5.3% in 2011-12. Health care and education will continue to experience modest growth with declines forecast in all other program areas along with a 37% reduction in the capital program. The 2011 budget marks the Alward government’s first budget. Although the fiscal plan only provides a one-year outlook, it reiterates the commitment to return to balance by 2014-15. The Province intends to present a detailed multi-year plan in next year’s budget with specific measures identified to meet deficit reduction targets. DBRS expects that, absent stronger-than-expected economic growth, most of the efforts will be focussed on controlling spending as economic growth remains subdued and the appetite to raise taxes may be limited.

DBRS-adjusted debt is forecast to rise by $1.2 billion in 2011-12, or 11.9%, pushing the debt-to-GDP ratio to 36.9%. Despite the growing debt burden, DBRS notes that this outlook marks an improvement from what had been anticipated last year. DBRS estimates that New Brunswick’s debt-to-GDP ratio should stabilize around 37% by 2012-13 before gradually declining thereafter. This is below the peak of 40% projected at the time of last year’s review but will, nonetheless, be heavily reliant on further development of the Province’s deficit reduction plan and a continuation of modest economic growth.

For 2011, the Province has used a real GDP growth assumption of 1.5% which appears conservative in relation to the private sector consensus tracked by DBRS. For 2012, real growth of 2.2% is expected, in line with the current private sector consensus but nonetheless still below the national average. The strong Canadian dollar, slow U.S. recovery and reduced investment are weighing on New Brunswick’s prospects. As a result, in the absence of unexpectedly strong economic growth, considerable spending restraint will be required over the planning horizon if fiscal balance is to be restored.

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.