DBRS Confirms Province of Manitoba at A (high) and R-1 (middle)

DBRS has today confirmed the long- and short-term debt ratings of the Province of Manitoba (Manitoba or the Province) at A (high) and R-1 (middle), respectively. The trend on both ratings remains Stable. Supported by a resilient and well-diversified economy, the Province has exhibited only a modest deterioration in fiscal performance in relation to peers through the most recent downturn which has helped to limit the increase in debt. An upcoming provincial election on October 4, 2011, adds some uncertainty to the fiscal outlook as recent polls point to a close race between the governing New Democratic Party and opposition Progressive Conservative Party. DBRS notes however, that details on the opposition’s fiscal plan are not yet available although an emphasis on spending discipline is a key pillar of their platform.

The Province continues to adhere to its plan to restore fiscal balance by 2014-15 with almost no change in the outlook from the 2010 budget. After ending the 2010-11 fiscal year with a somewhat better-than-expected deficit (based on preliminary results), Manitoba is budgeting for a shortfall of $438 million in 2011-12, or $1.1 billion on a DBRS-adjusted basis. This equates to 1.9% of GDP, leaving Manitoba near the middle of pack among provinces in terms of fiscal outlook. Total revenues are projected to grow by a modest 2.2% as declining federal transfers and the implementation of certain tax cuts are more than offset by growth in the provincial tax base. Similarly, total expenditures are forecast to rise by 2.0% as the Province focuses on containing growth in wages and salaries while allowing for continued increases in health and education programs. The projected return to balance by 2014-15 seems achievable however, it is likely to entail DBRS-adjusted deficits ranging from 2.0% to less than 1.0% of GDP over the period. Initiatives to restore balance are primarily focused on spending restraint as any major tax increases would require a referendum. Of note, additional costs related to spring flooding will likely cause the Province to miss this year’s deficit target but this is not expected to materially affect the fiscal recovery plan. Preliminary estimates point to a net cost to the Province, after federal recoveries, of $154 million.

At March 31, 2011, DBRS-adjusted debt was estimated to have grown by $1.3 billion, or 7.9% over the prior year. This has pushed the debt-to-GDP ratio up to 32.4%. A large capital program will continue to drive an increase in debt which is projected to grow by $1.6 billion, or 9.4% in 2011-12. As a result, the debt-to-GDP ratio is expected to reach 33.6% – the fifth lowest debt burden among Canadian provinces. A gradually declining deficit and smaller capital program will help to curb debt growth over the medium term as the debt-to-GDP ratio is expected to peak at about 34% in 2012-13, which remains very manageable for the rating.

Following real GDP growth of 2.5% in 2010, the Province has assumed real growth of 2.7% for 2011 and 2012 which is somewhat below the private sector consensus. Solid population growth and a strong labour market should remain supportive of the domestic economy, although another year of significant flooding is likely to have dampened growth prospects. In addition, the economic outlook remains clouded by fiscal consolidation efforts in the United States and Europe along with ongoing sovereign debt challenges that could potentially disrupt the global economic recovery. Nonetheless, DBRS believes Manitoba is well-positioned to ride out the current storm provided fiscal discipline remains sound and debt growth contained.

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.