DBRS Confirms British Columbia at AA (high) and R-1 (high), Trends Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of British Columbia (the Province) at AA (high), along with its Long-Term and Short-Term Debt ratings at AA (high) and R-1 (high), respectively. All trends are Stable and supported by the Province’s track record of strong fiscal discipline, which has led to improving fiscal performance and placed the debt-to-GDP (gross domestic product) ratio on a steady downward trend. This provides British Columbia with ample financial flexibility; however, DBRS notes that the debt burden remains meaningfully above the pre-recession low, thus limiting upward pressure on the rating. British Columbia Hydro & Power Authority’s Long-Term Obligations and Short-Term Obligations are also confirmed at AA (high) and R-1 (high), respectively, with Stable trends.

Based on preliminary results, the Province recorded an $879 million surplus for the fiscal year ended March 31, 2015. On a DBRS-adjusted basis, this equates to a shortfall of $1.1 billion, or 0.4% of GDP, which notably exceeded expectations. DBRS-adjusted revenues grew by an estimated 5.5%, healthily surpassing budget targets owing to strong tax receipts while spending grew at a slower pace of 4.4%. DBRS-adjusted debt (defined as tax-supported debt plus unfunded pension liabilities) is forecast to have grown by a modest 2.9% in 2014–15, roughly consistent with expectations. This resulted in a debt-to-GDP ratio of 19.7% at March 31, 2015, down from 19.9% in 2013–14 and marks the beginning of a downward trend.

The latest budget points to a continuation of sound fiscal performance in British Columbia. A surplus of $284 million is projected for 2015–16. On a DBRS-adjusted basis, this equates to a manageable shortfall of $1.6 billion, or just 0.7% of GDP. Total DBRS-adjusted spending is expected to outpace revenue growth; however, with labour agreements in place with more than two-thirds of the civil service, this increases the likelihood that spending targets can be met. Over the medium term, fiscal projections point to small DBRS-adjusted deficits of less than 0.5% of GDP, and are considered to be very manageable for the credit given the ongoing use of prudent economic assumptions, forecast allowances and budget contingencies. As a result, DBRS expects the debt-to-GDP ratio to continue trending downward, approaching 18.3% of GDP by 2017–18. While acknowledging the encouraging trend, DBRS notes that this level remains above the low of 15.3% recorded in 2008–09.

British Columbia is expected to remain one of the economic growth leaders in 2015 and 2016, with real GDP forecast to grow by 2.3% and 2.4%, respectively. This appears to be conservative when compared with the current private sector consensus tracked by DBRS. Over the longer term, the Province remains optimistic about the potential for future liquefied natural gas development, although these projects have not been incorporated into budget forecasts, thus presenting some upside risk to growth assumptions. Meanwhile, key downside risks to the forecast include a slowdown in domestic economic activity, weakness in external demand for provincial exports or continued soft inflation.

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 Canadian Provincial Governments and Rating Agents of the Crown, which can be found on our website under Methodologies.

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