DBRS Confirms British Columbia at AA (high) and R-1 (high), Trends Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of British Columbia (the Province) at AA (high), along with its long-term and short-term debt ratings at AA (high) and R-1 (high), respectively. All trends are Stable, supported by the Province’s track record of strong fiscal discipline, which has helped to place the debt-to-GDP ratio firmly on a downward trend. This improvement provides the Province with ample financial flexibility; however, DBRS notes that the debt burden remains meaningfully above pre-recession lows, thus limiting near-term upward pressure on the ratings.

Based on preliminary estimates, fiscal performance outperformed expectations in 2015–16, with the Province recording a surplus of $377 million. On a DBRS-adjusted basis, including capital spending as incurred, this equates to a shortfall of $1.0 billion, or just 0.4% of GDP, compared with a budgeted shortfall of $1.6 billion. Total revenues grew by 3.6% in 2015–16, exceeding budget targets, although this was outpaced by expenditure growth of 4.8% on account of rising health-care and education costs. As a result, DBRS-adjusted debt grew by 2.0%, and when combined with modest growth in nominal GDP, this helped to lower the debt-to-GDP ratio to 19.3% from 19.6% in 2014–15, marking the second consecutive year of decline.

British Columbia’s fiscal outlook remains favourable in relation to its peers, with the 2016–17 budget forecasting a surplus of $264 million. On a DBRS-adjusted basis, this translates into a deficit of $1.9 billion, or 0.7% of GDP. Revenue growth is projected to be very modest at just 1.6%, while budget projections point to a 3.4% increase in DBRS-adjusted spending, with an emphasis on new funding for health and social services. Over the medium term, the fiscal plan is relatively unchanged from what was presented last year, with only small DBRS-adjusted deficits of approximately 0.4% of GDP anticipated in 2017–18 and 2018–19, thereby helping to limit debt growth. As a result, the debt-to-GDP ratio is forecast to continue on its downward trend, approaching 18.0% by 2018–19.

British Columbia is expected to lead all provinces in economic performance, with real GDP budgeted to grow by 2.4% in 2016 followed by 2.3% in 2017. This appears to be relatively conservative when compared with the current private sector consensus tracked by DBRS of 2.8% and 2.6% in 2016 and 2017, respectively, adding an additional layer of prudence to the medium term fiscal outlook.

Although no rating movement is anticipated in the near term, DBRS would consider a positive rating action provided that British Columbia’s strong fiscal discipline is maintained, leading to a reduction in the debt-to-GDP ratio firmly below 15% on a sustained basis. A negative rating action, while unlikely, could result from a relaxation in fiscal discipline or sizeable economic shock leading to a material deterioration in fiscal results and debt metrics.

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 Rating Canadian Provincial Agents of the Crown, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.