DBRS Changes Trend to Negative on Province of Alberta on Continued Weakness in Oil Prices and Fiscal Deterioration

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt ratings of the Province of Alberta (Alberta or the Province) at AAA and has revised the trend to Negative from Stable. At the same time, DBRS has confirmed the Province’s Short-Term Debt Rating at R-1 (high) with a Stable trend. DBRS has also confirmed the Long-Term Debt Obligations of Alberta Capital Finance Authority at AAA and has changed the trend to Negative from Stable.

The Negative trend reflects DBRS’s expectation that the continued weakness in oil prices will contribute to a material erosion in the Province’s fiscal performance and accumulation of debt, relative to those anticipated at the time of DBRS’s last review in November 2015. DBRS believes that the fiscal response is unlikely to be adequate to maintain credit metrics consistent with the AAA rating, in particular maintaining a DBRS-adjusted debt burden below 15% of GDP. Debt is now expected to exceed 15.0% of GDP as early as F2016-17. Without a material improvement in the fiscal and debt outlook supported by a credible multi-year fiscal plan, a one-notch downgrade to the rating is likely.

At the time of DBRS’s last review, oil prices were budgeted at USD 61/barrel (bbl) and USD 68/bbl in 2016-17 and 2017-18, respectively. Subsequently, prices have continued to fall with current prices for West Texas Intermediate oil, reaching approximately USD 27/bbl, and forward contracts around USD 36/bbl and USD 39/bbl for YE2016 and 2017, respectively. As a result, fiscal deficits are expected to be even wider than originally anticipated over the next four fiscal years. DBRS believes that the fiscal shortfall is likely to exceed 3.0% of GDP for 2015-16 and potentially rise even higher in the following year.

The current private sector consensus tracked by DBRS points to 0.3% real GDP growth in 2016 before recovering to 2.0% growth in 2017; however, DBRS believes that these growth forecasts are likely to be revised downward in light of continued commodity price weakness and uncertainty regarding the full extent of the current economic downturn in the Province.

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

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.