DBRS Confirms Province of Saskatchewan at AA and R-1 (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt ratings of the Province of Saskatchewan (the Province) at AA, along with its Short-Term Debt rating at R-1 (high). All trends are Stable. A long track record of sound fiscal performance, low debt burden and above-average economic growth add considerable support to the Province’s strong credit profile, providing ample flexibility to manage unforeseen challenges. Notwithstanding these strengths, current commodity price weakness is likely to pressure fiscal results and potentially slow the pace of debt reduction, thus limiting upward momentum on the ratings.

Fiscal performance remains strong in Saskatchewan, having recorded a better-than-expected consolidated surplus of $589 million in 2013–14. On a DBRS-adjusted basis, this equates to a small deficit of $69 million, or 0.1% of gross domestic product (GDP), after making adjustments to recognize capital expenditures on a cash basis rather than as amortized and to exclude the gain on the sale of Information Services Corporation of Saskatchewan. As a result, Saskatchewan’s debt burden continues to be very manageable, with DBRS-adjusted debt rising by 5.7% in 2013–14. Solid economic growth provided an offset as the debt-to-GDP ratio inched up only slightly to 14.7% from 14.6% in 2012–13.

For 2014, the Province has assumed real GDP growth of 2.2%, followed by 2.3% in 2015. While this year’s forecast appears optimistic in light of the current private sector consensus, the assumption for 2015 still looks conservative. Gradually improving global economic conditions and a weaker Canadian dollar are expected to provide support to the provincial economy. However, as demonstrated this year, weather conditions and volatile commodity prices will continue to drive variability in Saskatchewan’s economic performance for the foreseeable future.

Saskatchewan’s summary budget points to a surplus of $71 million in 2014–15. On a DBRS-adjusted basis, this translates into a shortfall of $479 million, or 0.6% of GDP, and continues to compare very favourably with provincial peers. Total revenues are projected to decline by 1.4% based on slower economic growth and lower earnings from government business enterprises. Meanwhile, spending growth is expected to be relatively well contained in 2014–15, rising by just 1.4%. Although the summary budget does not provide a medium-term fiscal outlook, the government has stated its commitment to balanced budgets going forward, with a preference to do so by way of spending discipline rather than increased taxes. If realized, this would likely translate into small DBRS-adjusted deficits. As a result, Saskatchewan’s debt burden is expected to remain unchanged at 14.7% in 2014–15 and gradually decline toward 14.0% thereafter. As indicated at the time of last year’s review, a sustained reduction in the debt burden approaching 10% of GDP would be needed to support potential ratings improvement. However, DBRS notes that the direction for commodity prices, particularly oil, is likely to have a meaningful impact on both fiscal results and nominal GDP, and should the recent downturn in oil prices persist, this could stall the improvement of the Province’s debt burden.

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 methodologies are Rating Agents of the Crown, Rating Canadian Provincial Governments and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.