DBRS Confirms Province of Prince Edward Island at A (low) and R-1 (low)

DBRS Limited (DBRS) has confirmed the Issuer Rating of the Province of Prince Edward Island (PEI or the Province) at A (low), along with its Long-Term Debt and Short-Term Debt ratings at A (low) and R-1 (low), respectively. All trends are Stable. Although delayed, the Province continues to make progress in its efforts to restore fiscal balance, and the economy continues to demonstrate resilience, but fiscal discipline will need to be maintained to ensure that targets are adhered to and the debt burden begins to trend downward from its currently high level.

In 2014–15, according to recently released public accounts, fiscal performance exceeded expectations, with PEI recording a deficit of $20.3 million. On a DBRS-adjusted basis, after recognizing capital expenditures as incurred rather than as amortized, this equates to a shortfall of $35.9 million, or 0.6% of GDP. Total revenues grew by a modest 2.0% year over year, while expenditures actually declined slightly and were consistent with budget targets. DBRS-adjusted debt fell by 3.8% from the prior year, driven by lower crown loans and a reduction in guaranteed debt. This lowered the debt-to-GDP ratio to 45.2%, from 48.8% in 2013–14 but represents the second-highest debt burden among all provinces.

For 2015, the Province budgeted for robust real GDP growth of 2.7%, before moderating to 2.1% in 2016. However, in PEI’s recent second quarter update, this has been reduced to 1.5% real growth in both 2015 and 2016, close to the current private sector consensus tracked by DBRS, and highlights downside risk to the fiscal outlook.

Following the general election in May 2015, which saw the Liberals re-elected to their third consecutive majority mandate, a revised fiscal plan was presented in June 2015. PEI’s fiscal recovery plan has been delayed by another year, with the budget pointing to a deficit of $19.9 million in 2015–16, as opposed to a small surplus anticipated in last year’s plan. On a DBRS-adjusted basis, this translates into a fiscal shortfall of $28.8 million, or just 0.5% of GDP, and the second-best fiscal outlook among all provinces. Over the medium term, DBRS-adjusted surpluses of 0.0% to 0.6% of GDP are forecast for 2016–17 and 2017–18, respectively. The plan is based on average revenue growth of 3.0%, while DBRS-adjusted spending is to be held to just 1.1% growth. This represents an ambitious target and will be dependent on the outcome of ongoing labour negotiations. When combined with potentially lower than planned economic growth, DBRS believes that fiscal risks are tilted to the downside, and indeed, PEI’s second quarter projections point to a wider-than-planned shortfall. However, the overall outlook remains very manageable in relation to provincial peers. PEI’s five-year capital plan points to gradually declining capital spending and, when combined with expectations of a gradual improvement in fiscal performance, this is expected to lead to further declines in the debt-to-GDP ratio to approximately 40% by 2017–18. This marks an improvement relative to last year’s expectations, although DBRS believes that upward revisions to capital expenditures or missed fiscal targets may slow the rate of decline in the 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 methodology is Rating Canadian Provincial Governments, 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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