DBRS Confirms the Province of New Brunswick at A (high) and R-1 (middle)

DBRS has today confirmed the Issuer Rating of the Province of New Brunswick (the Province) at A (high), along with its Long-Term Debt and Short-Term Debt at A (high) and R-1 (middle), respectively. All trends remain Stable. Economic performance remains decidedly weak and has forestalled the Province’s fiscal recovery efforts. However, DBRS is encouraged by the steps taken to boost revenues and solid effort to contain spending – a welcome resolve that will need to be maintained to stabilize the debt burden and prevent undue erosion to the credit profile.

New Brunswick missed its budget target notably in 2012-13 as preliminary results pointed to a deficit of $411 million. This equates to a DBRS-adjusted shortfall of $942 million, or 2.9% of GDP, after recognizing capital expenditures as incurred rather than as amortized, and represents the second largest fiscal gap among provinces. The impact of weak economic activity weighed on revenues while spending was largely on track with budget forecasts despite an unfavourable variance on pension expense. As a result, DBRS-adjusted debt grew by an estimated $1.4 billion, or 13.3%, pushing the debt-to-GDP ratio to 36.0%, up from 32.6% in 2011-12.

The domestic economy is expected to remain weak in 2013 although improving external markets, largely in the United States, may provide some modest uplift to growth prospects. The Province has assumed real GDP growth of just 0.5% and 1.4% in 2013 and 2014, respectively. DBRS notes that these forecasts appear to be fairly conservative when compared with the current private sector consensus. While there is some uncertainty regarding the likelihood of major new capital projects coming to fruition, a continued recovery in the United States should have positive spillover effects in New Brunswick.

In response to muted economic activity, the government has taken steps to boost revenues through higher taxes while working hard to contain spending. For 2013-14, a deficit of $478 million is anticipated. This points to a DBRS-adjusted shortfall of $544 million, or 1.6% of GDP. Aided by a decision to unwind tax cuts introduced by the previous government, total revenues are forecast to grow by 2.0%. Meanwhile, total expenditures are projected to decline by 2.9%, largely as a result of capital spending returning to historical levels. The Province has abandoned its plan to return to balance by 2014-15 although the medium-term outlook points to gradually improving fiscal results with DBRS-adjusted deficits of around 1% of GDP by 2014-15. As such, debt growth is forecast to slow meaningfully and debt-to-GDP to stabilize at around 37%. While DBRS remains concerned by the lack of plan to restore fiscal balance, it takes comfort in the concerted effort to control spending and prudent budgetary assumptions which should be conducive to fiscal improvement, provided economic conditions gradually improve.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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