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 and Short-Term Debt ratings 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” and the Guaranteed Long-Term and Short-Term Debt ratings of Newfoundland and Labrador Hydro at “A” and R-1 (low), respectively. All trends remain Stable. Weak commodity prices present significant fiscal and economic challenges for the Province, although past efforts to reduce debt provide a degree of flexibility to withstand the current deterioration in fiscal performance and expected accumulation of debt. In light of continued commodity price weakness, DBRS expects that additional fiscal measures will likely be required to limit the deterioration in key financial metrics.

Based on preliminary results, Newfoundland recorded a deficit of $924 million in 2014-15. After including capital expenditures as incurred rather than as amortized, this translates into a weaker-than-expected DBRS-adjusted shortfall of $1.2 billion, or 3.5% of GDP, and represents the largest deficit among provinces. As a result, debt grew by just over 10% and pushed the debt-to-GDP ratio to 31.7%, up from 27.5% a year earlier.

For 2015, the budget is based on an assumed contraction in real GDP of 0.3%; however, the current private-sector consensus tracked by DBRS points to a more significant contraction of 2.1%. Reduced output from the offshore sector caused by natural declines in production and scheduled maintenance will be a key driver behind the weak growth outlook. The environment is expected to remain challenging in 2016 with the current consensus pointing to a further decline in real GDP of 0.6%.

For 2015-16, the Province has budgeted for another sizable shortfall of approximately $1.1 billion; however, given the ongoing weakness in commodity prices, this gap is likely to be even wider. On a DBRS-adjusted basis, this equates to a deficit of $1.3 billion, or 4.0% of GDP. Over the medium term, Newfoundland’s fiscal recovery plan forecasts gradually declining deficits until balance is restored in 2019-20. This points to deficits falling from 3.2% of GDP in 2016-17 to 0.5% of GDP in 2019-20; however, DBRS notes that this plan is based on gradually improving crude oil prices to support average revenue growth of 4.3%. At the same time, program spending growth is forecast to average just 1.0% which will make the upcoming labour negotiations challenging. Furthermore, the upcoming provincial election adds an element of uncertainty regarding fiscal policy over the medium term. DBRS estimates that the debt-to-GDP ratio will peak at just above 42% in 2017-18, although this could be even higher if fiscal targets are missed. The debt outlook remains within an acceptable range for the ratings, but rising debt will erode flexibility within the credit profile.

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.

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

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.

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