DBRS Confirms Newfoundland and Labrador at “A” and R-1 (low), Stable Trend

DBRS has today confirmed the Issuer Rating of the Province of Newfoundland and Labrador (Newfoundland or the Province) at “A,” along with its Long-Term Debt and Short-Term Debt at “A” and R-1 (low), respectively. All trends remain Stable. Volatile commodity prices, which have a significant bearing on the provincial treasury, have caused the plan to return to balance to be extended by one year. DBRS acknowledges the solid progress made by the Province to manage the debt burden and improve liquidity; however, amid softening revenues, renewed fiscal resolve will be required to achieve fiscal balance. Additionally, despite the favourable long-term economic benefits that will be accrued from the Lower Churchill River hydroelectric project (Lower Churchill Project), the project presents near-term risk to the outlook as it will likely reduce reserve levels while increasing debt levels materially so, should there be cost overruns.

As public accounts are yet to be released, based on preliminary results, the Province reported a weaker-than-expected $431 million deficit in 2012-13, which translates to a DBRS-adjusted shortfall of $758 million, or 2.2% of gross domestic product (GDP) – a deterioration from the surplus posted in the prior year. Driving the weaker fiscal results were a decline in royalties stemming from extended maintenance shutdowns at all three of the Province’s offshore oil-producing projects and Brent crude prices averaging USD 112/barrel during the year – well below the USD 124/barrel budget assumption. Consequently, total revenues missed projections notably, slumping by 14.2% year over year, despite a healthy rise in taxation receipts. Encouragingly, the Province was able to quell the pace of expenditure growth in 2012-13, with spending falling by 1.1%. The DBRS-adjusted debt burden rose modestly to $9.1 billion by March 31, 2013, owing largely to growing unfunded pension liabilities. The debt-to-GDP ratio was virtually unchanged at 26.9% in 2012-13 and sits at the low end of the spectrum for the rating category. Based on the recently released Fall update, real GDP growth of 5.8% is expected in 2013 (slightly lower than the budget forecast), followed by a contraction of 1.6% in 2014. This compares with a private-sector growth forecast of 5.3% and 1.3% in 2013 and 2014, respectively. Domestic economic activity has been buoyant for some time, driven by solid gains in employment, consumption and investment related to large capital projects. However, given the Province’s heavy dependence on the export of resources and commodities, external demand and changes in the timelines and number of major projects or in oil production could alter the forecast significantly.

The budget points to a continuation of difficult fiscal conditions over the next couple of years. A deficit of $564 million is budgeted for the current fiscal year, which translates to a DBRS-adjusted shortfall of $936 million, or 2.5% of GDP. This compares with an average of 1.5% for all provinces. Total revenues are projected to remain flat, while DBRS-adjusted spending is expected to grow by 2.6%, as growth in general government spending, sustained capital spending and higher debt charges crowd out declines in both health-care and education spending. Amid volatility in the mining and oil and gas (O&G) sectors, the plan to return to balance has been extended by one year to 2015-16, with the projected performance likely to translate to DBRS-adjusted deficits representing 2.9% and 0.4% of GDP in 2014-15 and 2015-16, respectively. Despite the fiscal weakness, the Province does not intend to issue debt in the current fiscal year as maturing debt and other cash requirements are expected to be addressed with cash on hand. With only modest growth in DBRS-adjusted debt owing to higher pension obligations, the Province’s debt-to-GDP ratio is projected to fall to 25.9% in 2013-14. The Fall update points to an improvement in the Province’s fiscal position, largely stemming from tighter expenditure management.

The Province has put forward a ten-year Sustainability Plan, which focuses on deficit elimination and reviews of post-secondary institutions, regional health authorities and pension reform in the early years, and maintaining fiscal discipline, economic diversification and debt reduction in the later years. Further, the Province has reaffirmed its commitment to reduce its net debt per capita to the Canadian provincial average within ten years. DBRS believes that such plans illustrate the Province’s willingness to tackle its pressing challenges and its commitment to fiscal soundness. However, in the intervening years, uncertainty remains with respect to the progress of the Lower Churchill Project, and potential cost overruns, which still has the potential to erode financial flexibility.

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

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

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