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

DBRS has today confirmed the Issuer Rating of the Province of Alberta (the Province) at AAA, along with its Long-Term Debt and Short-Term Debt ratings at AAA and R-1 (high), respectively. The trend on all ratings is Stable. The latest budget marks a change in fiscal management strategy and a move toward increased borrowing for capital purposes. As such, DBRS anticipates that this is likely to result in a faster pace of debt growth, potentially eroding some of the flexibility within the current ratings, especially if a return to fiscal balance is further delayed.

After achieving a near-balanced position in 2011-12, Alberta moved back into a sizable deficit position of $2.8 billion in 2012-13 as reported on a consolidated fiscal plan basis. This translates into a DBRS-adjusted deficit of $4.1 billion, or 1.3% of GDP, and was notably weaker than originally budgeted, driven primarily by lower-than-expected non-renewable resource revenues. This also resulted in the need to borrow an additional $1.0 billion for provincial capital purposes, which along with higher-than-planned borrowing for the Alberta Capital Finance Authority (ACFA), contributed to an increase in DBRS-adjusted debt by $2.8 billion, or almost 20%, in 2012-13. Debt, as measured in relation to GDP, stood at 5.5% at March 31, 2013, up from 4.7% the previous year. While Alberta’s debt burden has been increasing measurably over the past five years, it remains by far the lowest among Canadian provinces.

Slowing investment is weighing on growth forecasts, with real GDP budgeted to rise by 2.9% in both 2013 and 2014, down from 3.8% in 2012. However, these projections do not account for the severe flooding experienced in Calgary and neighbouring areas this past June. This undoubtedly had a negative impact on economic activity in Alberta, but estimates vary on the extent of the damage. Rebuilding and recovery efforts are likely to provide a boost to the local economy and offset some of the earlier economic disruption. The current private sector consensus points to real growth of 2.6% and 3.5% in 2013 and 2014, respectively, suggesting that while this year’s activity may fall short of expectations, it should be made up next year.

For 2013-14, the budget points to a DBRS-adjusted shortfall of $4.3 billion, or 1.3% of GDP, unchanged from 2012-13. Total revenues are projected to remain relatively flat as higher tax receipts and federal transfers are budgeted to be offset by declines in non-renewable resource revenues and investment income. Total DBRS-adjusted expenditures are planned to increase by just 0.5%. Budget projections point to a gradual improvement in fiscal performance over the medium term, although DBRS notes that no provisions have been made for increased public sector compensation – an ambitious assumption in light of past settlements. In 2014-15, a DBRS-adjusted shortfall of $1.9 billion, or 0.5% of GDP, is anticipated, followed by a small surplus in 2015-16. As a result, debt-to-GDP could rise as high as 9.0% by 2015-16. This outlook is significantly different from what was anticipated by DBRS last year when debt-to-GDP was expected to peak below 5.0% in 2013-14. Overall, Alberta’s credit profile is expected to remain sound, but continued worsening of the debt outlook to the point where the debt-to-GDP ratio could remain above 15% for an extended period could put downward pressure on the ratings.

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.