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

DBRS has today confirmed the long- and short-term debt ratings of the Province of British Columbia (the Province) at AA (high) and R-1 (high), respectively, both with Stable trends. The Province continues to demonstrate its disciplined approach to fiscal management by introducing a number of new revenue measures in the latest budget to offset the impact of a weaker growth outlook, and moving forward with cost-containment efforts. As a result, the fiscal recovery plan remains on track and debt growth is well contained, which provides comfort that financial metrics will remain supportive of the current ratings.

Based on preliminary results, British Columbia recorded a deficit of $2.5 billion in 2011-12. On a DBRS-adjusted basis, this equates to a shortfall of $5.0 billion, or 2.4% of GDP. However, had the repayment of federal harmonized sales tax (HST) transition monies been excluded, the DBRS-adjusted deficit would have been a more modest 1.6% of GDP, in line with expectations. For 2012-13, the Province is budgeting for a deficit of $968 million, or $3.8 billion on a DBRS-adjusted basis. Total revenues are forecast to rise by only 0.8% over the prior year and total spending is forecast to increase by 1.5%, excluding the effect of the HST transition funding repayment in 2011-12. Despite a weaker growth outlook, British Columbia has stuck to its plan to return to balance by 2013-14 by introducing new revenue measures, including cancelling the planned elimination of the small business income tax, potentially raising the general corporate income tax rate by 2014, if needed, and selling off surplus corporate assets. On a DBRS-adjusted basis, modest deficits of less than 1% of GDP are still foreseen in 2013-14 and 2014-15, although these remain very manageable. Furthermore, given the Province’s strong fiscal resolve, there is the potential to outperform targets.

The budget assumes real growth of 1.8% for 2012, down from 2.0% in 2011. This compares favourably with the private sector consensus (2.2%) followed by DBRS. In 2013, real growth of 2.2% is assumed. DBRS notes that the pace of recovery in the United States (particularly for the housing market), the strength of the Canadian dollar and a potential disruption in global financial markets stemming from the sovereign debt crises, continue to pose key risks to the outlook. Nevertheless, the use of prudent assumptions provides comfort that modest disruptions can be absorbed without significantly altering the fiscal recovery plan.

DBRS-adjusted debt is estimated to have grown by $3.0 billion, or 8.2%, in 2011-12. As a result, debt-to-GDP rose only modestly to 18.6% but remains the third lowest among Canadian provinces. The budget points to an increase in debt of $4.0 billion, or 10.2%, in 2012-13, which is expected to boost the debt-to-GDP ratio to 19.7%, the highest level in eight years. Debt growth should slow by 2013-14 as the Province continues its effort to restore balance and capital spending returns to more historical levels. Provided economic growth continues as budgeted, the debt-to-GDP ratio is likely to stabilize around 20%, remaining supportive of the financial profile.

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.