DBRS Comments on New Brunswick’s 2016 Budget: A Shadow Lingers, No Early Spring Here

Following the release of New Brunswick’s (the Province or New Brunswick) 2016 budget on February 2, 2016, DBRS Limited (DBRS) remains concerned that the fiscal outlook and resulting increase in debt will continue to erode flexibility within existing ratings (rated A (high) and R-1 (middle) with Stable trends). DBRS will be meeting with the Province for a full in-depth review in the coming weeks to assess the credibility of the new multi-year fiscal plan, understand the implementation risks and what tools the Province has to mitigate any further erosion in the credit profile. Shortly thereafter, DBRS will provide further commentary on the rating and trend. DBRS notes that if there is sufficient uncertainty regarding the Province’s ability to adhere to its fiscal targets, or weather continued economic headwinds, there is a reasonable probability of revision of the trend to Negative.

DBRS-adjusted debt is expected to surpass 41% of gross domestic product (GDP) by March 31, 2016, and peak at 42% by 2017–18, based on the Province’s medium-term fiscal outlook and capital plan, and assuming no change in unfunded pension obligations. As first mentioned by DBRS in February 2014, and reiterated at the time of last year’s review, should additional fiscal slippage push the debt-to-GDP ratio toward 45%, this would likely have negative rating implications.

New Brunswick’s 2016 budget is the first detailed multi-year fiscal plan to be presented by the Liberal government aimed at addressing the Province’s structural deficit. This plan points to a gradual reduction in the fiscal shortfall over the medium term, although a return to balance is not anticipated until 2020–21, two years later than previously articulated.

On a DBRS-adjusted basis, the plan points to a deficit of approximately $370 million, or 1.1% of GDP, in 2016–17, falling to roughly $20 million, or 0.1% of GDP, by 2020–21. DBRS cautions that this outlook is dependent on the Province’s ability to achieve the savings identified as part of its Strategic Program Review, limit growth in program spending, achieve desired revenue growth from a number of new revenue measures to be enacted this year and modest economic growth.

For 2016 and 2017, the Province has assumed real GDP growth of 0.4% and 0.3%, respectively, which compares to the current private sector consensus of 0.9% and 1.2%. The economy continues to be challenged by low private sector investment and a weak demographic outlook. The recent closure of the Piccadilly potash mine, delays for other major investment projects and some of the policy announcements contained in the budget will negatively impact growth in the near term. A low Canadian dollar and expectations for moderate economic growth in Ontario and Québec, along with the United States, should be supportive of exports but it is unclear how much uplift a weaker currency will provide to provincial economic activity and government revenues.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.

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