DBRS Confirms Province of Nova Scotia at “A”, Trend Stable

DBRS has today confirmed the ratings of the Province of Nova Scotia (Nova Scotia or the Province) at “A” for long-term debt and R-1 (low) for short-term obligations. The trends are Stable. The confirmation is supported by the Province’s successful efforts to restrain spending, steady but slow economic growth and a credible plan to return to fiscal balance by 2013-14.

The year ending March 31, 2011, was the first year of Nova Scotia’s four-year plan to return to fiscal balance by 2013-14 and a deficit of $222 million had been projected ($1.0 billion in DBRS-adjusted terms after recognizing capital expenditures as incurred, rather than as amortized). The latest information available from the Province indicates that a surplus of $447 million, which equates to a $304 million deficit in DBRS-adjusted terms, is now expected for the year. The positive result was driven by own-source revenues coming in $261 million higher than expected as stronger economic activity combined with an increase in the harmonized sales tax (HST) and changes to personal income tax for certain wage earners. Prior-year adjustments totalling $196 million also helped the bottom line. DBRS notes that the unanticipated surplus was due not only to revenue measures, there was also a decline in expenditures totalling $250 million, illustrating the Province’s sharpened focus on fiscal discipline. The reduction in expenditures is a notable accomplishment and lends credibility to the government’s deficit-fighting plan.

This stronger-than-expected performance is tempered to a degree by the fact that the Province made a smaller than usual contribution to its universities in 2010-11, as it had effectively prefunded 2010-11 by providing $342 million in year-end funding in 2009-10. The DBRS-adjusted deficit takes this into account by recognizing in 2010-11 the $342 million of funding that had been provided in 2009-10. The Province has now returned to the practice of funding universities annually, meaning that such an adjustment will not be necessary in future years.

The current fiscal year is the second year of the back-to-balance plan and the as-reported deficit is estimated at $390 million ($679 million DBRS-adjusted), up slightly from the $370 million that had been estimated at the time of the 2010-11 budget. The Province plans to hold the line on spending in 2011-12, with the only significant increase in expenditure owing to a return to the past practice of providing university funding in each year. Revenue will benefit from a full year of increased HST. A deficit of $216 million is now forecast for 2012-13, with a small surplus of $15 million to follow in 2013-14 (on an as-reported basis). Despite the slight increase in the projected deficit in 2011-12, DBRS takes comfort in the Province’s demonstrated ability to curtail expenditure and expenditure growth and by the fact that the back-to-balance plan incorporates both tax measures and spending restraint. DBRS is of the view that fiscal plans that include measures on the revenue side and the expenditure side are more likely to meet their objectives than those that focus solely on expenditure restraint.

Nova Scotia was not hit as hard by the recession of 2009 as were some other Canadian provinces, with the Province’s real GDP contracting by only 0.1% compared with a 2.5% decline for Canada as a whole. The diversified nature of the Province’s economy and its role as a service center for the region make for less volatile economic results. However, this stability means that Nova Scotia’s growth rate during times of expansion usually lags the Canadian average. Growth for 2010 is estimated at 2.1%, compared with 3.1% for Canada as a whole. The 2011-12 budget assumes real GDP growth of 1.9% for both 2011 and 2012 versus 2.6% and 2.5%, respectively, on a national basis. The assumptions made by the Province are very close to the average of private sector forecasts tracked by DBRS and give no reason to think that unrealistic growth assumptions are being relied upon to increase revenue.

DBRS-adjusted debt grew by $245 million, or 2%, in 2010-11, as the unplanned surplus allowed the increase in debt to be significantly less than budgeted. The Province also borrowed in order to fully fund its employees’ pension plan, thereby eliminating its unfunded liability. However, as unfunded pension liabilities are taken into account in DBRS-adjusted debt calculations, this has had no impact on DBRS’s view of the Province’s debt burden. The slower-than-expected growth in debt, combined with GDP growth, allowed the debt-to-GDP ratio to fall to 35.4% at year-end 2010-11, down from 36.4% the previous year. Given Nova Scotia’s plan for two more years of deficits, the debt-to-GDP ratio is estimated to increase to 36.3% by the end of fiscal 2011-12, and is expected to decline gradually over the forecast horizon, reaching approximately 35% by 2013-14. These debt-to-GDP ratios remain comfortable for the Province’s rating.

Provided Nova Scotia remains on course to meet its budget targets and continues to exhibit strong fiscal discipline, DBRS may reconsider the Province’s rating trend at the time of the next rating review.

Note:
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.