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

DBRS Limited (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. DBRS has also confirmed the Guaranteed Long-Term Debt rating of Newfoundland and Labrador Municipal Financing Corporation at “A.” All trends remain Stable. Newfoundland’s low, though rising, debt burden and track record of sound fiscal management continue to support the ratings. However, recent commodity price weakness and slowing economic momentum expected over the medium term could threaten fiscal targets, absent mitigating fiscal measures.

Newfoundland recorded a deficit of $389 million in 2013-14. This translates to a shortfall of $697 million, or 1.9% of gross domestic product (GDP), on a DBRS-adjusted basis (after recognizing capital expenditures as incurred, rather than as amortized). Although better than expected, fiscal results represent a deterioration from the prior year. Expenditures increased modestly and came in comfortably below budget forecasts. However, despite a significant rebound in offshore oil royalties, revenues came in slightly lower than the prior year. Total debt, as measured by DBRS, rose by 5.3% in 2013-14, though strong economic growth resulted in the debt-to-GDP ratio falling to 26.9%, down from 28.3% in 2012-13.

Economic growth is expected to taper off, with the Province assuming real GDP growth of just 0.5% in 2014 and no growth in 2015. As a result, the fiscal gap is projected to widen to $538 million in 2014-15, which translates into a DBRS-adjusted deficit of $808 million, or 2.2% of GDP. The Province is relaxing the tight expenditure control seen in recent years, and will increase funding allocations to health care, education and social services, and offer tax relief. DBRS-adjusted debt is poised to jump by 16.1% in 2014-15 to $11.2 billion, and together with slowing economic growth will see the debt-to-GDP ratio climb to 30.0%, though this level remains manageable for the current rating. DBRS notes that while the Province continues to target a return to balance by 2015-16, current weakness in the price of Brent crude oil and lower than expected oil production volumes present a significant downside risk to the fiscal outlook, if these trends persist. The Province continues to make significant equity investments in Nalcor Energy to advance the Muskrat Falls hydroelectric project, which when fully operational will help to diversify the provincial economy. However, potential cost overruns during the ongoing construction phase of this project have the potential to erode financial flexibility, and stand as a key impediment to ratings improvement.

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.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.