DBRS Confirms Province of Prince Edward Island at A (low) and R-1 (low)

DBRS has today confirmed the Issuer Rating of the Province of Prince Edward Island (PEI or the Province) at A (low), along with its Long-Term Debt and Short-Term Debt ratings at A (low) and R-1 (low), respectively. The ratings are supported by a resilient, though slow-growing, economy and the steady progress being made to restore fiscal balance. However, sustained expenditure restraint and supportive economic conditions will be required to bring debt down from its currently high level, which has been driven in large part by substantial special pension contributions made in recent years.

Based on preliminary results, the Province recorded a shortfall of $52 million in 2013-14. On a DBRS-adjusted basis (recognizing capital expenditures as incurred, rather than as amortized), this translates to an $80 million deficit, or 1.4% of gross domestic product (GDP), generally consistent with expectations and a marked improvement from 2012-13. The better performance was a result of strong sales tax collections, federal funding for the Province’s move to a harmonized sales tax, program spending discipline and a continued scaling back of capital spending levels. However, debt as measured by DBRS (tax-supported debt plus unfunded pension liabilities) is estimated to have risen by 15.8% to $2.7 billion, notably above expectations at the time of last year’s review, due to promissory notes used to fund the pension plans. At 47.4% of GDP, the Province’s debt burden is now second-highest among provinces and poses a significant challenge for a small economy characterized by modest growth.

Economic growth in PEI is relatively more stable, but tends to lag the Canadian average. The Province expects real GDP growth of 1.3% in 2014 and 1.7% in 2015, generally in line with current average private sector forecasts. Overall, economic risks are considered to be more balanced than last year. For 2014-15, the budget calls for a $40 million deficit, which is slightly wider than was projected in last year’s plan. On a DBRS-adjusted basis, this translates into a deficit of roughly $47 million, or a very manageable 0.8% of GDP, and illustrates the notable progress that has been made on the fiscal front in recent years. Debt is projected to rise only marginally in 2014-15, although this is expected to be offset by very modest growth in nominal GDP, resulting in the debt-to-GDP ratio falling to 46.4% in 2014-15.

The Province’s fiscal recovery plan remains on track, with a small surplus targeted by 2015-16. Over the medium term, DBRS-adjusted surpluses of roughly 0.1% of GDP are budgeted through 2016-17. Together with a dramatic ratcheting back of capital spending from recent highs, this should help to bring the debt-to-GDP ratio down to roughly 44% by 2016-17, a level which is higher than was expected at the time of last year’s review. DBRS notes that the Province has enacted comprehensive changes to its civil service and teachers’ pension plans, including the introduction of career averaging and conditional indexation, which have improved their long-term sustainability. However, as a result of these changes, the Province has made special payments to the plans via promissory notes, which have been the main driver of debt growth in recent years. The promissory notes have in fact put the plans in surplus positions. While the pension reforms are laudable, DBRS notes that at current levels, PEI’s debt burden is high, both by historical standards and in relation to provincial peers, limiting flexibility to deal with any potential economic shocks.

DBRS notes that the provincial election, expected to take place in fall 2015, will likely be delayed to the following year due to the upcoming federal election.

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.

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