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

DBRS has today confirmed the Issuer Rating of the Province of Prince Edward Island (PEI or the Province) at A (low), along with the its Long-Term Debt and Short-Term Debt ratings at A (low) and R-1 (low), respectively. All trends remain Stable. PEI’s credit profile continues to be supported by a resilient economy; however, recurring fiscal shortfalls and sizeable capital programs have driven the debt burden notably higher in recent years. Accordingly, DBRS is encouraged by actions taken to restore fiscal soundness, including the introduction of a detailed three-year plan to restore balance, though the plan has again been extended by one year. In light of the soft growth outlook, DBRS is of the opinion that a keen focus on fiscal discipline will be required to prevent another delay to the plan, and stop erosion in the credit profile.

Based on preliminary results, the Province ended fiscal year 2012–13 with a $69 million shortfall, or
$119 million in DBRS-adjusted terms (i.e., recognizing capital expenditures as incurred rather than as amortized). This was slightly weaker than projected, but improved over the prior year. Though trending in the right direction, at 2.2% of gross domestic product (GDP), PEI continues to carry one of the largest deficits among Canadian provinces. Debt as measured by DBRS (including unfunded pension liabilities) is expected to have risen by 11.5% to $2.3 billion, largely owing to a sharp rise in promissory notes to address unfunded pension liabilities, driving the debt-to-GDP ratio to an estimated 42.6% as of March 31, 2013.

PEI’s small but stable economy produced real growth of 1.2% in 2012, the best among the Atlantic provinces. For 2013, the Province is forecasting real GDP growth of 1.6%, somewhat ahead of the current private-sector consensus that points to real growth of 1.5% in 2013, followed by 1.6% in 2014. Though relatively stable, the importance of food products and tourism leaves the Province susceptible to economic shocks in the U.S., its largest export market, and exchange rate volatility.

The 2013–14 budget points to a DBRS-adjusted deficit of $78 million, or 1.4% of GDP. Supported by stronger tax receipts, stemming from the introduction of a harmonized sales tax, total revenues are forecast grow by 2.9%. New spending in priority areas will lift expenditures but only marginally, as a significant reduction in capital spending will provide a meaningful offset. Debt growth is projected to slow notably in 2013, and combined with moderate nominal GDP growth, will cause the debt-to-GDP ratio to move to 42.1% in 2013–14.

The fiscal recovery plan has been pushed out to 2015–16, the second consecutive extension in two years. The updated plan revises average annual revenue growth targets down to 3.1% over the three years, and relies on more constrained spending growth of 1.5% annually over the period, with the most severe tightening pushed out to the final year of the plan. Along with this, a planned reduction in capital spending to more sustainable levels will help alleviate pressure on the debt-to-GDP ratio, which is expected to stabilize at around 40% by 2015–16. However, with the highest dependence on federal transfers of all Canadian provinces, slow economic growth expectations and limited immediate room to grow revenues further, DBRS believes the spending restraint required to achieve fiscal balance will test the Province’s resolve.

Notes:
All figures are in Canadian 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.