DBRS Confirms the Province of New Brunswick at A (high) and R-1 (middle)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt rating of the Province of New Brunswick (the Province) at A (high). The Short-Term Debt rating has been confirmed at R-1 (middle). Concurrently, the Guaranteed Long-Term and Guaranteed Short-Term Liabilities of New Brunswick Municipal Finance Corp. are confirmed at A (high) and R-1 (middle), respectively. The trends on all ratings are Stable based on DBRS’s belief that the fiscal recovery plan, as articulated in the Province’s February 2016 budget (see “DBRS Comments on New Brunswick’s 2016 Budget: A Shadow Lingers, No Early Spring Here” at www.dbrs.com), is achievable given the Province’s demonstrated ability to control expenditure growth, the relatively small size of projected deficits and the detailed plans to achieve savings and grow revenues. However, much will depend on ongoing political will to implement the plan and economic performance evolving as expected or better. There is limited flexibility within existing ratings to withstand any further deterioration in the fiscal outlook without negatively impacting the ratings.

Despite constraining program spending growth in recent years, a weak economy and ongoing demand pressures have resulted in the government facing a structural deficit that has persisted since the onset of the great recession. Based on preliminary results, a deficit of $466 million is estimated for 2015–16. On a DBRS-adjusted basis, after making adjustments to recognize capital spending as incurred, rather than as amortized, and remove the contingency reserve, this translates into a shortfall of $453 million, or 1.4% of gross domestic product (GDP). As a result, DBRS-adjusted debt is estimated to have grown by 4.5% and, when combined with a slow-growing economy, has resulted in the debt-to-GDP ratio rising to 41.8% from 41.3% a year earlier.

New Brunswick’s 2016 budget is the first 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, supported by a roughly equal mix of revenue measures and expenditure savings. However, a return to balance is not anticipated until 2020–21, two years later than previously articulated. On a DBRS-adjusted basis, this points to a deficit of approximately 1.0% of GDP in 2016–17, which gradually declines over the subsequent four years, assuming that capital spending levels off in the outer years of the plan. DBRS-adjusted debt is expected to continue rising modestly, and when combined with only slow growth in nominal GDP, this points to a debt ratio peaking around 43% of GDP by 2017–18.

New Brunswick’s economy has seen weak growth in recent years and the outlook continues to be challenged by weak demographics resulting in a shrinking labour force, limited growth opportunities from existing industry and weak private sector investment. 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 0.7% and 0.9%.

DBRS believes that New Brunswick’s ratings are unlikely to experience any upward pressure in the near term. However, as first mentioned by DBRS in February 2014, and reiterated at the time of last year’s review, weaker fiscal or economic results that point to the debt burden reaching or exceeding 45% of GDP would likely have negative rating implications for both the long- and short-term ratings.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.