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

DBRS has today confirmed the Long-Term Debt and Short-Term Debt ratings of the Province of Saskatchewan (Saskatchewan or the Province) at AA and R-1 (high), respectively. The trends on both ratings are Stable. Saskatchewan’s strong credit profile continues to be supported by a relatively low and declining debt burden, favourable fiscal results and strong economic growth potential. Although considerable uncertainty persists with respect to global growth forecasts and, ultimately, demand for Saskatchewan’s growing commodity exports, the Province demonstrated in 2009-10 that it can manage these headwinds with only limited erosion to its financial profile.

Saskatchewan recorded a relatively sound surplus of $48 million in 2010-11. On a DBRS-adjusted basis, this translates into a deficit of $431 million, or a mild 0.7% of GDP. Somewhat better results are forecast for 2011-12, with a DBRS-adjusted shortfall of $262 million expected, based on budget estimates. At 0.4% of GDP, Saskatchewan’s projected fiscal shortfall is the smallest among all Canadian provinces. Total revenues are projected to rise slightly, supported by rising tax collections and strong resource royalties, although DBRS notes the significant volatility in natural resource prices remains. The Province aims to hold spending relatively flat year over year – a target that may be missed based on increased costs associated with spring flooding and the recent labour agreement reached with teachers. Over the medium term, the budget points to modest DBRS-adjusted deficits of less than 1% of GDP annually through 2014-15, which DBRS considers to be very manageable.

Saskatchewan is one of only two provinces to have registered a decline in its debt-to-GDP ratio in 2010-11, which fell from 18.4% in 2009-10 to 17.9%. Based on budget projections, debt is projected to grow by 1.4%, or $149 million, in 2011-12. This increase is entirely due to rising unfunded pension liabilities, which will be partially offset by the Province’s decision to make a special contribution from the Growth and Financial Security Fund (GFSF) of $325 million toward debt retirement. As a result, Saskatchewan’s debt-to-GDP ratio is expected to fall further, to 16.7%, leaving it with the second-lowest debt burden among Canadian provinces.

In 2010, Saskatchewan experienced real growth of 1.7% as the recovery started to gain momentum, but crop production was negatively affected by extensive flooding. For 2011, the budget assumes real GDP growth of 4.2%, which now appears somewhat optimistic in relation to the current private-sector consensus. Nonetheless, Saskatchewan is expected to be one of the growth leaders among Canadian provinces and early indications suggest the domestic economy remains strong. For 2012, the Province assumes real GDP growth of 2.8%, which is still meaningfully below the private-sector consensus, providing a buffer should the growth momentum soften as expected by DBRS.

A provincial election is scheduled for November 7, 2011, and recent public opinion polls suggest that the governing Saskatchewan Party continues to hold a strong lead over the opposition New Democratic Party. As such, DBRS does not anticipate any material changes in fiscal priorities.

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.