DBRS Confirms the Province of New Brunswick at A (high) and R-1 (middle)

DBRS Limited (DBRS) has confirmed the Issuer Rating of the Province of New Brunswick (the Province) at A (high), along with its Long-Term Debt and Short-Term Debt ratings at A (high) and R-1 (middle), respectively. Concurrently, the Guaranteed Long-Term and Guaranteed Short-Term Liabilities of New Brunswick Municipal Finance Corp. are confirmed at A (high) and R-1 (middle), respectively. All trends are Stable. However, the fiscal and economic environment remains challenging, and the Liberal government, recently elected in September 2014, has yet to articulate its detailed medium-term fiscal plan. As a result, DBRS remains concerned about the Province’s fiscal resolve and ability to constrain debt growth, leaving only limited flexibility to withstand further erosion in the credit profile.

In 2014–15, preliminary results point to a deficit of $255 million. On a DBRS-adjusted basis, this translates into a better than expected shortfall of $322 million, or 1.0% of gross domestic product (GDP) as revenue growth outpaced expenditures. As a result, the debt-to-GDP ratio is estimated to have grown to 40.5% as of March 31, 2015, up from 38.7% a year ago, and represents the fourth-highest debt burden among Canadian provinces.

For 2015, the Province has assumed real GDP growth of 1.8%, which now appears optimistic when compared with the current private sector consensus tracked by DBRS. Despite a weak first quarter, improving economic prospects in the United States, combined with a weaker Canadian dollar, are expected to be favourable for New Brunswick’s export sector, while domestic activity is forecast to show some modest improvement. Nevertheless, economic growth is expected to remain subdued and lag the national average.

The current budget points to a deficit of $477 million in 2015–16, which includes a $150 million contingency reserve to protect against potential revenue shortfalls. After making adjustments to recognize capital expenditures as incurred, rather than as amortized, and remove the contingency reserve, this translates into a DBRS-adjusted shortfall of $425 million, or 1.3% of GDP. While the 2015–16 budget does not include a medium-term fiscal plan, the government has initiated a Strategic Program Review to put forward recommendations through a combination of additional revenue measures and long-term savings to address the structural deficit with the goal of restoring fiscal balance by 2018–19. Based on this objective, the Province’s medium-term capital plan, and assuming no change in unfunded pension obligations, DBRS expects debt growth to moderate to just 4% or less over the medium term, which would be sufficient to hold the debt-to-GDP burden to 41% or less. This is consistent with the peak anticipated at the time of last year’s review. However, should the Province fail to articulate a credible medium-term fiscal plan, potentially leading to further fiscal deterioration and a debt-to-GDP ratio approaching 45%, this would be cause for concern and could result in downward pressure on the rating.

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 and DBRS Criteria: Guarantees and Other Forms of Explicit Support, 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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