DBRS Confirms Province of Alberta at AAA and R-1 (high), Stable

DBRS has today confirmed the Long-Term Debt and Short-Term Debt ratings of the Province of Alberta (the Province) at AAA and R-1 (high), respectively. The trend on both ratings remains Stable and is supported by the Province’s efforts to restore fiscal balance, a very low debt burden and strong economic fundamentals driven by robust investment in the energy sector. Nevertheless, Alberta’s high reliance on non-renewable resource revenues leaves it exposed to volatility in commodity prices and demand, which adds complexity to fiscal management. This may make the objective of restoring fiscal balance by next year difficult to achieve if energy prices remain materially below forecast.

In 2011-12, the Province recorded a small deficit of $23 million, or $1.5 billion on a DBRS-adjusted basis, handily outperforming budget expectations. For 2012-13, the budget was introduced prior to a spring provincial election which, despite polling that indicated a close race, once again saw the Progressive Conservatives win a strong majority. Although the budget forecast points to somewhat weaker results than in the prior year, a DBRS-adjusted shortfall of $2.2 billion represents less than 1.0% of GDP and a very favourable position in relation to many provincial peers. Total revenues are projected to rise by 2.2% year-over-year and continue to be heavily influenced by non-renewable resource revenues. The Province has assumed an average oil price of US $99/barrel for the current fiscal year. However, based on an average price of US $92/barrel year-to-date, oil royalties are tracking notably behind budget. In fact, the first quarter update released on August 30, 2012, indicated that weak non-renewable resource revenues could boost the deficit by $1.4 to $2.4 billion. Meanwhile, total spending is forecast to rise by 4.8%, led by sizeable increases in health and social services expenditures. After relaxing its return-to-balance target by one year in last year’s budget, Alberta remains committed to balancing by 2013-14. However, DBRS notes that the direction of resource royalties and the outcome of labour negotiations with various groups coming up for renewal will ultimately determine whether or not fiscal targets can be achieved.

Alberta continues to be a perennial growth leader, having recorded real GDP growth of 3.5% in 2011 based on provincial estimates. The year 2012 started off strong, although there are indications that momentum is beginning to slow. The Province has assumed real growth of 3.8% for the year, which now appears somewhat optimistic in relation to the private sector consensus. A softening global growth outlook is weighing on prospects for 2013 as the Province has also assumed real growth of 3.8%, more than 0.5% above the current private sector consensus. Ongoing sovereign debt concerns in Europe and the likelihood for increased fiscal restraint in the United States is likely to weigh on commodity prices and, ultimately, on Alberta’s growth prospects.

Based on the budget, DBRS-adjusted debt is expected to rise moderately by $638 million, or 4.6% in 2012-13. However, solid growth in nominal GDP is likely to provide an offset, helping to slightly reduce Alberta’s debt-to-GDP ratio to 4.8%. As the Province continues with its efforts to restore fiscal balance, the debt-to-GDP ratio is expected to fall further, toward 4.2% by 2014-15. The Province has announced that it is reviewing its savings plan strategy, the outcome of which is not expected until next year’s budget. DBRS notes that any efforts to boost savings and reduce reliance on non-renewable resource revenues to fund programs would be viewed positively.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.