DBRS Confirms Province of Manitoba and Related Entities at A (high) and R-1 (middle)

DBRS has today confirmed the Issuer Rating of the Province of Manitoba (the Province or Manitoba) at A (high), along with its Long-Term Debt and Short-Term Debt ratings at A (high) and R-1 (middle), respectively. DBRS has also confirmed the ratings of The Manitoba Hydro-Electric Board (for more information, see The Manitoba Hydro-Electric Board report published September 16, 2013). The trends on all ratings are Stable. Manitoba’s credit profile is supported by a resilient and well-diversified economy, however, fiscal projections continue to underwhelm by contributing to a rising debt burden and forestalling any improvement in the credit profile.

For 2012–13, Manitoba recorded a deficit of $580 million based on its recently released public accounts. This translates into a DBRS-adjusted shortfall of $1.3 billion, or 2.3% of GDP, (after including capital expenditures as incurred rather than as amortized), and marked an improvement from the budget as a result of lower-than-anticipated capital spending. Total revenues were largely in line with budget and up by less than 1.0% from the prior year while spending contracted by 3.4% year-over-year. As a result, DBRS-adjusted debt rose by $1.5 billion, or 7.6%, pushing the debt-to-GDP ratio to 36.9% as of March 31, 2013, up from 35.5% the prior year.

The private sector consensus followed by DBRS points to moderate real GDP growth of 2.0% in 2013, accelerating to 2.4% in 2014, which tracks closely to budget estimates of 1.9% and 2.3%, respectively. While global economic uncertainty and a softening domestic environment continue to present downside risks to Manitoba’s outlook, a modest recovery in U.S. housing, strong automotive sales and demand for manufactured and agricultural products should provide relief to the export sector.

For 2013–14, the budget points to a deficit of $518 million, or $1.6 billion on a DBRS-adjusted basis. This equates to 2.7% of GDP and represents a moderate deterioration from 2012–13. Total revenues are estimated to rise by 3.0% in 2013–14 as new tax measures were introduced to offset the absence of growth in federal transfers and other non-tax revenues. Meanwhile, DBRS-adjusted expenditures are forecast to rise by 4.7% in 2013–14 — a level that exceeds the provincial average. The Province has delayed its fiscal recovery plan with a return to balance not anticipated until 2016–17. On a DBRS-adjusted basis, assuming relatively stable capital spending, this is likely to result in persistent deficits of around 1.6% to 2.4% of GDP — one of the weakest outlooks among provinces. DBRS notes that, Manitoba’s success at containing spending, especially with respect to public sector compensation, will be a key determinant in the Province’s ability to meet its targets. Given the longer fiscal recovery plan, debt is expected to continue rising between 5% to 8% annually, resulting in a debt burden of approximately 40% of GDP by 2016–17. While considered manageable for the current ratings, this exceeds the peak in debt anticipated in DBRS’s last review and continues to erode some of Manitoba’s once sound financial flexibility.

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.