DBRS Confirms the Province of New Brunswick at A (high) and R-1 (middle)

DBRS has today confirmed the Issuer Rating of the Province of New Brunswick (the Province) at A (high), along with its Long-Term Debt and Short-Term Debt ratings at A (high) and R-1 (middle), respectively. All trends are Stable; however, DBRS is concerned by the deterioration in fiscal outlook and higher debt trajectory presented in the 2014 budget (see: DBRS Comments on 2014 New Brunswick Budget: Limited Room Left for Further Erosion, February 5, 2014). A return to balance has been delayed until 2017-18 and entails additional debt that was not factored into last year’s rating review. While potentially manageable for the credit profile, DBRS remains concerned that continued sluggish economic growth for an extended period of time or weakening fiscal resolve could push credit metrics to levels no longer consistent with current ratings.

Based on preliminary results, the Province incurred a deficit of $564 million in 2013-14, a notable deterioration from the $479 million shortfall originally projected. On a DBRS-adjusted basis, this translates into a shortfall of $607 million, or 1.9% of GDP, potentially the fourth-largest fiscal gap among provinces. Economic growth has remained stubbornly weak in New Brunswick, with nominal GDP estimated to have grown by just 0.5% in 2013. As a result, total revenues declined by 0.8% year over year. Encouragingly, the Province has shown considerable success at containing expenditures below budget in 2013-14, but efforts have not been sufficient to fully offset the revenue shortfall. Consequently, DBRS-adjusted debt (defined as tax-supported debt plus unfunded pension liabilities) is estimated to have grown by $760 million, or 6.4%, pushing debt-to-GDP to 39.8% at March 31, 2014, up from 37.6% a year earlier. This positions New Brunswick as the province with the fourth highest debt burden.

For 2014, the budget assumes real GDP growth of 1.1% which is just slightly below the current private sector forecast. The domestic economy remains sluggish although the investment climate is expected to improve modestly in 2014 after two years of decline. In addition, a strengthening U.S. economy shows promise for New Brunswick given its reliance on export markets and a weaker Canadian dollar will provide some much needed relief for exporters. For 2015, the budget assumes real GDP growth of 2.1% which is above the current private sector consensus of 1.6% and presents a risk to fiscal targets.

The government is becoming increasingly mindful of the impact additional austerity measures would have on the economy. As such, no new tax increases or spending reduction efforts are being implemented in 2014-15 beyond those already underway. For 2014-15, the budget points to a deficit of $391 million. This represents a DBRS-adjusted shortfall of $531 million, or 1.6% of GDP, exceeding the deficit of roughly 1% of GDP anticipated at the time of DBRS’s last review. Based on the medium-term plan, deficits are projected to gradually decline, with an eventual surplus of $119 million forecast in 2017-18. New Brunswick’s debt burden is now expected to peak around 41% in 2015-16 and is well-above pre-recession levels of less than 30%. As a result, even if the Province successfully executes its fiscal recovery plan as currently envisioned, DBRS believes little flexibility will be left within the current rating to weather further erosion. Additional fiscal slippage pushing the debt-to-GDP ratio toward 45% would be cause for concern for DBRS and could result in downward pressure on the rating. An upcoming election, scheduled for September 22, 2014, adds some uncertainty as a change in government may result in a revised fiscal strategy.

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.