DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of Alberta (the Province) at AAA, along with its Long-Term Debt and Short-Term Debt ratings at AAA and R-1 (high), respectively. Concurrently, the Long-Term Obligations rating of the Alberta Capital Finance Authority has been confirmed at AAA. The trends remain Stable based on DBRS’s view that the current deterioration in oil prices, and resulting deterioration in fiscal outlook and increase in debt, is manageable but is likely to exhaust flexibility within the current ratings. Further erosion in the fiscal outlook, leading to potentially higher debt than currently projected, would be cause for concern for DBRS.
Alberta introduced a new budget on October 27, 2015—the first budget under the newly elected New Democratic Party government. The Province now plans to return to fiscal balance by 2019–20, two years later than planned by the previous government. For 2015–16, the budget points to a deficit of $6.1 billion compared with $5.0 billion at the time of the March budget. On a DBRS-adjusted basis, this equates to a shortfall of approximately $9.8 billion, or 2.9% of GDP—the second-largest fiscal gap among all provinces. Over the medium term, the deficit is projected to decline gradually before returning to a small surplus in 2019–20. This translates into DBRS-adjusted deficits of roughly 2.7% to 0.8% of GDP. The current plan is based on a recovery in oil prices and containing spending, which has yet to be proven.
Real GDP is budgeted to contract by 1.0% in 2015, which compares with the current private sector consensus tracked by DBRS of -1.2%. The rapid decline in commodity prices has led to a notable decline in investment intentions. As investment recovers from steep declines, a modest recovery is expected in 2016, with the Province forecasting real GDP growth 0.9%, which is just slightly below the current private sector consensus. However, risks remain tilted to the downside, and the Province remains heavily exposed to commodity price volatility.
Based on budget estimates, DBRS-adjusted debt is forecast to rise by almost 25% in 2015−16. The increase is being driven almost entirely by significant borrowing for capital purposes, while operating needs will be met through draws on the Contingency Account. Given the notable decline anticipated in nominal GDP, this is expected to boost the debt-to-GDP burden to 9.8%, up from 7.1% in 2014−15. Ongoing fiscal deficits and an elevated capital plan will continue to pressure debt needs over the medium term. As a result, the debt-to-GDP ratio, as calculated by DBRS, is projected to reach approximately 14.0% by 2017−18 and peak at just under 15% in the outer two years of the fiscal plan. As was first noted by DBRS in 2013, continued worsening of the debt outlook to the point where the debt-to-GDP ratio could remain above 15% for an extended period would put downward pressure on the ratings. This could arise from a combination of factors, including oil prices remaining near their current level without any offsetting fiscal measures, difficulty in achieving slower expenditure growth, unforeseen economic shocks or a combination of any of the above.
All figures are in Canadian dollars unless otherwise noted.
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