DBRS Changes Trend to Negative on the Province of Newfoundland and Labrador on Significant Debt Growth amid Rapid Oil Price Decline

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt ratings of the Province of Newfoundland and Labrador (Newfoundland or the Province) at “A” and has revised the trend to Negative from Stable. At the same time, DBRS has confirmed the Province’s Short-Term Debt ratings at R-1 (low) with a Stable trend. DBRS has also confirmed the Guaranteed Long-Term Debt ratings of Newfoundland and Labrador Municipal Financing Corporation and Newfoundland and Labrador Hydro at “A” and has changed the trends to Negative from Stable. In addition, DBRS has confirmed the Short-Term Debt rating on Newfoundland and Labrador Hydro at R-1 (low) with a Stable trend.

The Negative trend reflects DBRS’s expectation that the rapid decline in oil prices will contribute to a material erosion in the Province’s fiscal performance and a rapid accumulation of debt. Although the government appears willing to undertake corrective action and has begun a rigorous budget process, DBRS believes that the Province’s ability to implement a fiscal response sufficient to slow the deterioration in the credit profile is limited. Without a material improvement in the fiscal and debt outlook supported by a credible multi-year fiscal plan, a one-notch downgrade is likely.

At the time of DBRS’s last review in November 2015, the debt-to-GDP burden was expected to peak above 42% by 2017–18. DBRS now estimates that the debt-to-GDP ratio could potentially exceed 55% as early as 2016–17, and will continue to rise thereafter. DBRS believes that a debt burden of this magnitude would be inappropriate for the current “A” rating given Newfoundland’s small and relatively resource-dependent economy. The current private-sector consensus tracked by DBRS points to a contraction in real GDP of 0.7% in 2016 before rebounding to 0.3% growth in 2017; however, DBRS believes that these growth forecasts are likely to be revised downward in light of continued commodity price weakness.

Newfoundland’s “2015 Economic and Fiscal Update” released in December 2015 was based on a Brent oil price assumption of USD 51/barrel (bbl) in 2016-17, rising to USD 61/bbl in 2017–18. Subsequent to the Province’s December update, oil prices have continued to fall, with current prices for Brent oil around USD 28/bbl and forward contracts around USD 34/bbl and USD 38/bbl for year-end 2016 and 2017, respectively. As a result, DBRS believes that the fiscal shortfall could reach 7.0% of GDP for 2015–16 and remain elevated over the medium term. This compares with a shortfall of just 4.0% anticipated at the time of DBRS’s last review.

DBRS will continue to monitor commodity prices and their impact on Newfoundland’s fiscal position and debt outlook and will provide further comment following the presentation of the Province’s 2016 budget expected in April 2016.

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.