DBRS Confirms Province of Prince Edward Island at A (low) and R-1 (low)

DBRS has today confirmed the Long-Term Debt and Short-Term Debt ratings of the Province of Prince Edward Island (PEI or the Province) at A (low) and R-1 (low), respectively. The trend on both ratings is Stable. A string of fiscal deficits have eroded financial flexibility and a return to fiscal balance is now projected in 2014-15, one year later than had been indicated at the time of the last DBRS review. Despite this slippage and the debt needs associated with an additional year of deficit, DBRS notes that the Province has now articulated a credible plan to return to balance and has taken action to this end, including the introduction of a harmonized sales tax. DBRS is of the view that these positive steps mitigate the erosion arising from the delayed return to balance.

Based on the most recent available information, the Province closed out the year ending March 31, 2012, with a deficit of $79 million, or $159 million in DBRS-adjusted terms taking account of capital expenditure as incurred rather than as amortized. This is a deterioration from the $127 million DBRS-adjusted deficit that had been expected. Higher-than-budgeted expenditures on employee benefits, health care and social assistance accounted for the majority of the below-budget performance. Expressed as a percentage of GDP, at 3.1%, PEI carries one of the highest deficits in the country, despite having experienced one of the mildest downturns in 2009.

The current fiscal year is the first in a three-year plan introduced in budget 2012-13 to return to fiscal balance by 2014-15. A deficit of $75 million, or $114 million DBRS-adjusted, is projected, little changed on an as-reported basis from the most recent result as revenue growth is expected to be marginal while benefit and health-care cost pressures remain substantial. The year-over-year improvement on DBRS-adjusted terms reflects a decrease in net capital expenditure. The Province is calling for a deficit of $34 million in 2013-14, followed by a small surplus of approximately $4 million the following year. Taking into account the still-significant level of capital expenditure, DBRS-adjusted deficits of $53 million and $7 million are expected in 2013-14 and 2014-15, respectively. While revenues are expected to rebound somewhat in 2013-14 and 2014-15, thanks in part to the introduction of the HST on April 1, 2013, expenditure restraint will be key if balance is to be achieved on the stated timeline.

The debt-to-GDP ratio stood at 39.6% in 2011-12 and is expected to rise to 41.0% in 2012-13. PEI is essentially tied with Ontario for the distinction of having the second-highest debt burden among Canadian provinces (Québec is first). This is a significant challenge for PEI’s small economy. Given the modest growth generally seen in the Province, rising nominal GDP cannot be relied upon entirely to decrease the burden. The debt load remains manageable at the current level but successful execution of the three-year fiscal plan will be essential in order to avoid further erosion of the Province’s fiscal profile and potential pressure on the ratings.

The resilient nature of the PEI economy means that growth is more stable but often lags the Canadian average. Real GDP growth in 2011 is estimated at 1.8%, slightly above the 1.7% assumption in the 2011-12 budget and below the 2.5% estimate for Canada as a whole. Income and employment indicators showed some strength in 2011. The budgeted assumption of real GDP growth for 2012 is 1.4%. This is below the latest average forecast of major Canadian banks tracked by DBRS, which predicts growth of 1.6%. The United States is PEI’s most important export market and signs that economic momentum may be waning south of the border represents a downside risk to growth projections.

Premier Robert Ghiz and his Liberal Party were reelected with a strong majority government in October 2011. With fixed election dates every four years, a stable political environment may afford the atmosphere required to tackle the Province’s fiscal challenges.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provinces, which can be found on our website under Methodologies.