DBRS Confirms Province of Alberta at AAA and R-1 (high), Stable

DBRS has today confirmed the Issuer Rating of the Province of Alberta (the Province) at AAA, along with its Long-Term Debt and Short-Term Debt ratings at AAA and R-1 (high), respectively. The trend on all ratings is Stable and continues to be supported by a manageable fiscal outlook, robust economic performance and low debt burden. However, DBRS notes that the Province now demonstrates an increased appetite for debt, mainly to address capital-related growth pressures that could gradually reduce flexibility in the profile, if not managed carefully.

For 2013-14, despite significant costs related to severe flooding experienced in June 2013, fiscal performance notably exceeded expectations as Alberta’s recently released public accounts point to a DBRS-adjusted surplus of $0.3 billion (after recognizing capital expenditures as incurred, rather than as amortized), compared to a $4.3 billion shortfall anticipated at the time of DBRS’s last review. This equates to 0.1% of GDP, one of the best results among provinces. Total revenues advanced by 12.8%, led by higher than planned tax receipts, non-renewable resource revenues and investment income. Meanwhile, total DBRS-adjusted expenditures have grown by a modest 1.8% year over year, after removing one-time costs related to the flooding. DBRS-adjusted debt rose by $6.5 billion to $23.2 billion in 2013-14, resulting in a debt-to-GDP ratio of 7.0% at March 31, 2014. This was up from 5.4% a year earlier, but remains by far the lowest among Canadian provinces.

For 2014, the budget assumed real GDP growth of 3.7%, in line with the current private sector consensus tracked by DBRS. The economic outlook looks equally encouraging for 2015, and Alberta is expected to continue to lead the country, with the latest consensus pointing to 3.4% real growth. DBRS notes that any constraints to further growth are likely to emerge in the form of restricted access to export markets, availability of skilled labour and commodity price volatility. Should the U.S. economy rebound faster than expected from a soft first quarter, this could present some upside risks to the forecast.

For 2014-15, the budget points to a DBRS-adjusted deficit of $2.3 billion, or 0.7% of GDP. This represents a deterioration from the previous year, but still one of the best fiscal outlooks among Canadian provinces. Total revenues are projected to increase by 1.5%, notably slower than the pace of spending. Nonetheless, growth in DBRS-adjusted debt is expected to slow over the medium term, rising by 15% in 2015-16 and 7% in 2016-17, potentially pushing the debt-to-GDP ratio above 9.0% by 2016-17. Although this would mark the highest level since 1998-99, DBRS remains comfortable with the current outlook. However, should the government’s appetite for debt increase such that the debt-to-GDP ratio could rise above 15% for an extended period, this could put downward pressure on the ratings.

Following the resignation of Alison Redford in March 2014, Dave Hancock was appointed interim premier. The Progressive Conservative Association of Alberta is currently conducting a leadership race, with an election scheduled to take place in September 2014. However, DBRS notes that this is not expected to result in a material change in the Province’s fiscal management practices.

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.