DBRS Confirms Province of Nova Scotia at “A” and R-1 (low), Changes Trend to Positive

DBRS has today confirmed the long- and short-term ratings of the Province of Nova Scotia (the Province) at “A” and R-1 (low), respectively, and has changed the trend on both ratings to Positive. The trend change is supported by the Province’s successful efforts to restrain spending growth and its demonstrated ability to meet or exceed fiscal targets required by its plan to return to budgetary balance by 2013-14. Sound debt management practices and an improving economic outlook lend further momentum to the improvement in the Province’s credit profile.

The year ending March 31, 2012, was the second year of Nova Scotia’s four-year plan to return to fiscal balance by 2013-14 and the Province posted a better-than-expected deficit of $261 million. On a DBRS-adjusted basis, recognizing capital expenditures as incurred rather than as amortized, this translates into a shortfall of $463 million, or 1.2% of GDP. This is one of the smallest deficits among provinces. Greater-than-expected revenue accounted for a portion of the improvement. However, program spending approximately $72 million lower than budgeted ($153 million lower in DBRS-adjusted terms) was the primary reason for the better-than-expected results. This was the third consecutive year that program expenditures were under budget and DBRS takes comfort in the Province’s ability to restrain spending growth in the face of cost pressures in health-care and public sector compensation. Thanks in part to lower levels of debt issuance flowing from better-than-forecast fiscal results in 2010-11 and 2011-12, debt service costs in 2011-12 were approximately $40 million lower than expected.

The current fiscal year is the third year of the back-to-balance plan and the deficit is estimated at $211 million ($431 million DBRS-adjusted), down slightly from the $216 million previously planned. Program expenditure is budgeted to increase by 3.2% over preliminary 2011-12 results. This rate of spending growth remains materially below historical trends. Growth in revenue is expected to be seen in both personal income tax receipts and equalization payments, with overall revenue expected to be up by 4.3%. A return to fiscal balance remains on track for 2013-14, with a small as-reported surplus expected in that year. Given the Province’s recent track record of managing expenses and meeting or beating fiscal targets, DBRS believes that, barring an economic shock, the goal of a balanced budget in 2013-14 is achievable.

The diversified nature of Nova Scotia’s economy and its role as a service centre for the region make for economic results that are less volatile than those experienced by some of its neighbours. Nova Scotia was one of the provinces least affected by the recession in 2009. However, stability is a two-way street and in times of growth the Province often lags the national average. Growth for 2011 is estimated at 1.2% versus 2.5% for Canada as a whole. The Province projects growth of 1.7% in 2012 and 1.9% in 2013, again lagging Canada-wide figures of 2.1% and 2.4%. The growth estimates are in line with the average private sector forecast tracked by DBRS for 2012 and slightly conservative for 2013. Weakness in the forest products industry affected 2011 results and concerns that federal government austerity measures may have a disproportionate impact on Nova Scotia weigh somewhat in the near term. However, the awarding of the approximately $25 billion national shipbuilding contract to the Halifax Shipyard is expected to add momentum to the provincial economy, with the impact on GDP and employment expected to be seen as early as 2012.

DBRS-adjusted debt grew by $1.1 billion, or 8%, in 2011-12. Nonetheless, better-than-expected fiscal results have translated into more modest debt needs than had been budgeted when the back-to-balance plan was introduced in 2010-11. Combined with modest GDP growth, this has allowed the debt-to-GDP ratio to fall slightly to 34.5% at year-end 2011-12. Nova Scotia has also taken positive steps to address pension liabilities, which will help mitigate DBRS-adjusted debt levels in future years. In light of these factors, DBRS expects the debt-to-GDP ratio to fall to the low 30% range by 2014-15, a level consistent with A (high)-rated provinces and supportive of the Positive trend on the rating.

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.