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

DBRS has today confirmed the Long-Term and Short-Term Debt ratings of the Province of Saskatchewan (the Province) at AA and R-1 (high), respectively. The trends on both ratings are Stable. Saskatchewan’s credit profile continues to be supported by its enviable fiscal performance, very manageable debt burden and a strong domestic economy. Although the Province remains exposed to significant economic and fiscal volatility due to its high reliance on resource revenues, the above attributes provide it with ample flexibility to withstand a period of slow economic growth or moderate deterioration in commodity prices without adversely impacting its credit profile.

In 2011-12, Saskatchewan recorded a surplus of $352 million. On a DBRS-adjusted basis, this equates to a deficit of $74 million, or just 0.1% of GDP, and represents the smallest shortfall among provinces. For 2012-13 the budget points to a larger DBRS-adjusted shortfall of $512 million, or 0.7% of GDP, owing to slow revenue growth and continued spending pressures although softening oil prices may cause the fiscal balance to deteriorate further. Total revenues are budgeted to grow by 1.4%, supported by rising tax receipts and non-renewable resource royalties, partially offset by a decline in federal transfers. However, based on an average WTI price of US$92/barrel so far this year, compared with an assumed US$101/barrel price, revenues could be tracking $170 million below budget. Total expenditures are forecast to grow by 5.2% in 2012-13, with health and social services being the primary drivers. DBRS notes that there are a number of collective agreements coming up for renewal before the end of the fiscal year which are likely to put pressure on spending targets, especially if the labour market remains strong. Over the medium term, the Province is budgeting for DBRS-adjusted deficits of less than 1% of GDP through 2015-16.

In 2011-12, DBRS-adjusted debt (defined as tax-supported debt plus unfunded pension liabilities) declined by 1.3% to $10.6 billion. As a result, Saskatchewan’s debt-to-GDP ratio fell to 14.7%, down from 16.9% a year earlier and remains the second-lowest debt burden among provinces. Debt is projected to increase by 6.6% in 2012-13, although further growth in nominal GDP is likely to provide an offset holding the debt-to-GDP ratio near its current level or slightly below. This is a very favourable position in relation to other provinces and gives Saskatchewan additional flexibility to navigate any economic headwinds.

Saskatchewan continued to be one of the provincial growth leaders in 2011, experiencing real growth of 3.6% based on budget estimates. For 2012, the Province has assumed real growth of 2.8% and DBRS notes that despite downward revisions to growth forecasts since the budget was introduced, this forecast remains conservative in relation to the private sector consensus. In 2013, the Province has budgeted for real growth of 2.6%, which is also below the current private sector consensus, providing some flexibility should growth forecasts continue to weaken. The Province remains particularly susceptible to fluctuations in commodity prices, namely oil and potash, and as such, is dependent on global demand. However, DBRS believes that Saskatchewan has the fiscal capacity and willingness to manage above-average volatility while still maintaining a financial profile consistent with the assigned ratings.

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.