DBRS Confirms Province of Saskatchewan at AA and R-1 (high)

DBRS has today confirmed the Issuer Rating of the Province of Saskatchewan (the Province) at AA, along with its Long-Term and Short-Term debt ratings at AA and R-1 (high), respectively. DBRS has also confirmed the ratings of Saskatchewan Power Corporation (for more information, see Saskatchewan Power Corporation report published May 24, 2013) and Saskatchewan Telecommunications Holding Corporation. The trends on all ratings are Stable. Saskatchewan’s strong credit profile continues to be supported by enviable fiscal results, a relatively low debt burden and a vibrant domestic economy. Although the Province remains exposed to significant economic and fiscal volatility due to its high reliance on resource revenues, the attributes described above provide it with ample flexibility and point to the potential for further improvement in the credit profile, provided fiscal discipline is maintained.

Saskatchewan recorded a surplus of $58 million in 2012-13. On a DBRS-adjusted basis, this translates into a deficit of $569 million, after making adjustments to: (1) exclude transfers from the Growth and Financial Security Fund, (2) include expected growth in pension liabilities not expensed by the Province and (3) recognize capital expenditures on a cash basis, rather than as amortized. The performance was somewhat weaker-than-expected, and a deterioration from the prior year, primarily due to a decline in natural resource revenues and higher spending levels. Yet still, at just 0.7% of gross domestic product (GDP), the shortfall was the smallest among Canadian provinces in 2012-13. A modest rise in nominal GDP growth could not outpace the rate of debt accretion, owing to continued growth in pension liabilities, ending a three-year decline in the Province’s relative debt burden. The debt-to-GDP ratio edged higher to 14.4% in 2012-13, from 14.1% in the prior year, but still remains relatively low.

The economy grew by 2.2% in 2012, again outpacing the national average. Economic growth is expected to pick up in 2013, with the Province assuming real growth of 2.6%, followed by 3.1% in 2014. This is generally consistent with the private sector consensus tracked by DBRS, but more aggressive in the out-year. The budget points to a small $32 million surplus for the current fiscal year, which equates to a DBRS-adjusted shortfall of $519 million, or 0.6% of GDP, with total revenue growth expected to exceed spending. Despite a favourable oil price differential versus the initial budget assumption, the first quarter update indicates that the budgeted surplus is now expected to be cut in half, due to higher weather-related spending. Driven by a continued increase in unfunded pension liabilities, and borrowing on behalf of Crown corporations and other guaranteed debt, DBRS-adjusted debt is expected climb by a further 5.5% in 2013-14. Nevertheless, at 14.7% of GDP, this still represents the second-lowest debt burden among Canadian provinces, providing ample financial flexibility.

Saskatchewan is expected to continue to experience favourable economic conditions relative to most other provinces. Over the medium term, the Province’s fiscal plan points to gradually improving surpluses, with revenues set to grow by 3.9% on average and spending by 3.0% over the forecast horizon, which will likely translate into DBRS-adjusted deficits of less than 0.5% of GDP to 2016-17. Despite sustained levels of capital spending to meet growth needs, and barring a weakening of fiscal resolve, the debt-to-GDP ratio is expected to steadily decline to 14.0% of GDP by 2016-17. DBRS cautions that fiscal results will continue to be heavily influenced by natural resource prices and production levels, which add complexity to fiscal management. Additionally, the Province will have to grapple with pressures of managing expectations of a population that is expanding quickly. Nevertheless, DBRS believes that if the Province is able to cope with these challenges, and maintain sound fiscal performance, a sustained reduction in the debt burden approaching 10% of GDP could have positive rating implications.

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.

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