DBRS Confirms Province of Manitoba at A (high) and R-1 (middle)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt ratings of the Province of Manitoba (the Province) at A (high), along with its Short-Term Debt rating at R-1 (middle), all with Stable trends. At the same time, the Long-Term and Short-Term Obligations ratings of The Manitoba Hydro-Electric Board are confirmed at A (high) and R-1 (middle), respectively, also with Stable trends.

Weak fiscal discipline has led to further delays in the Province’s anticipated fiscal recovery timeline, with a return to balance not foreseen until 2018–19 for core government operations. Despite fiscal challenges, debt remains manageable for the current ratings and a well-diversified and resilient economy should keep Manitoba somewhat insulated from the economic challenges facing some of its more resource-dependent neighbours.

Based on preliminary results, the Province recorded a deficit of $424 million in 2014–15. On a DBRS-adjusted basis, after including capital expenditures as incurred rather than as amortized, this equates to a shortfall of $1.3 billion, or 2.0% of GDP, and was consistent with expectations. As a result, DBRS-adjusted debt is estimated to have grown by $1.3 billion, or 5.4%, as of March 31, 2015, pushing the debt-to-GDP ratio up to 38.2%, from 37.6% a year earlier. This positions Manitoba with the fourth-highest debt burden among Canadian provinces.

For 2015, the Province has assumed real GDP growth of 2.5%, which now appears somewhat optimistic in relation to the private sector consensus forecast tracked by DBRS of 2.2%. Regardless, Manitoba is expected to be among the provincial growth leaders, given its well-diversified economy and only modest exposure to the energy sector. While real growth has disappointed in both Canada and the U.S. in the first half of 2015, a strengthening U.S. economy and weaker Canadian dollar should be supportive of a transition to stronger export-led growth for Manitoba. In 2016, the current consensus points to real GDP growth of 2.5%, above the 2.3% budget assumption.

Despite a sound economic outlook, Manitoba’s fiscal outlook continues to disappoint with efforts to restore fiscal balance now further delayed. The 2015 budget points to a return to balance by 2018–19 for core government operations, which compares to an expected balance by 2016–17 on a summary budget basis included in last year’s plan. For 2015–16, a shortfall of $422 million is projected and equates to a DBRS-adjusted deficit of $1.1 billion. This represents 1.7% of GDP and is a wider-than-average fiscal gap relative to provincial peers. Over the medium term, debt growth is expected to slow to between 3% and 5% annually, as the Province continues to address the fiscal imbalance. Provided targets are adhered to, this points to the debt burden stabilizing around 40% of GDP by 2017−18, a modest deterioration from that envisioned last year but still considered manageable for the existing ratings.

With a federal election scheduled for this fall, Manitoba’s next election – originally planned for October 2015 – is expected to be postponed until April 2016. Based on recent polls, a change in government is possible, with Progressive Conservatives well ahead of the governing New Democratic Party.

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 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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