DBRS Confirms Alberta at AAA and R-1 (high)

DBRS has today confirmed the Long-Term Debt and Short-Term Debt ratings of the Province of Alberta (Alberta or the Province) at AAA and R-1 (high), respectively. The trend on both ratings is Stable. The Province’s strong credit profile continues to be supported by a low debt burden, ample liquidity and an economy driven by robust investment in the energy sector. While heightened uncertainty in the global economy and the recent correction in energy prices add some uncertainty to the fiscal outlook, DBRS nevertheless believes that Alberta remains well positioned to withstand a period of soft economic growth and weaker energy prices.

Although very manageable, the Province’s 2011-12 budget points to a deficit of $3.4 billion, unchanged from the reported 2009-10 deficit. On a DBRS-adjusted basis (after recognizing capital expenditures on a pay-as-you-go basis rather than as amortized), this translates into a shortfall of $5.6 billion, or 1.9% of GDP. After three years of decline, total revenues were budgeted to increase by a modest 2.2%. Rising personal and corporate income tax receipts are expected to be only partially offset by lower investment income and federal transfers. DBRS-adjusted spending is forecast to rise by 5.1% in 2011-12, with health care being the primary driver. The Province has aimed to limit the increase in public-sector salaries and wages, although agreements with physicians and teachers are up for renewal and DBRS believes this could add to spending pressures in the years ahead. Instead of returning to balance in 2012-13 as had been planned, the Province has relaxed its plan to restore fiscal balance by one year, to 2013-14. On a DBRS-adjusted basis, the plan points to a deficit of less than 1.0% of GDP in 2012-13 and close to a balanced position in 2013-14.

Alberta posted strong real GDP growth of 3.5% in 2010, supported by solid domestic demand and a recovery in the energy sector. This trend has continued in the early part of 2011, but it is showing signs of slowing. The budget assumed real GDP growth of 3.3% for the current year, which is consistent with the latest private-sector consensus. However, DBRS believes that this is likely to be revised downward in the coming months given a faltering U.S. recovery, European sovereign debt troubles and a relatively strong Canadian dollar. For 2012, the private-sector consensus points to 3.2% real GDP growth, consistent with the budget forecast.

For 2011-12, the budget points to growth in DBRS-adjusted debt of 19.9%, or $2.5 billion. The expectation for strong growth in nominal GDP is likely to provide an offset, limiting the increase in debt-to-GDP, which is expected to reach 5.2%, up from 4.6% in 2010-11. Based on the Province’s medium-term outlook, debt is expected to continue rising, driven by additional needs of Crown corporations and further growth in unfunded pension liabilities. Alberta Heritage Savings Trust Fund assets are also budgeted to grow, providing a potential offset. This points to a debt-to-GDP ratio stabilizing at about 5.0%, somewhat lower than was anticipated last year. Alberta’s debt burden is still by far the lowest debt burden among Canadian provinces and remains firmly within its current rating category.

The governing Conservative Party recently selected a new leader, Alison Redford, to replace the outgoing premier, Ed Stelmach. She will be sworn in as premier on October 7, 2011.

Notes:
Debt is issued or guaranteed by the Province, including Alberta Capital Finance Authority, as well as deposits and certain debt of ATB Financial.

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.