DBRS Downgrades Province of Alberta to AA (high), Changes Trends to Stable

DBRS Limited (DBRS) has today downgraded the Issuer Rating and Long-Term Debt rating of the Province of Alberta (Alberta or the Province) to AA (high) and changed the trends of both to Stable. DBRS has also downgraded the Long-Term Debt obligations of Alberta Capital Finance Authority to AA (high) and revised the trend to Stable. At the same time, DBRS has confirmed the Province’s Short-Term Debt rating at R-1 (high) with a Stable trend.

On January 21, 2016, DBRS placed the Province’s long-term ratings on a Negative trend, based on the expectation that continued weakness in oil prices would contribute to a material erosion in fiscal performance and accumulation of debt. Furthermore, DBRS believed that the fiscal response would be 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. While oil prices have recovered somewhat since that time, Alberta’s 2016–17 budget, released on April 14, 2016, confirms a significant fiscal shortfall. This is magnified by the government’s reluctance to further rein in spending or adjust taxation levels and a sizable capital plan, which is expected to result in DBRS-adjusted debt rising above 17% of GDP by 2017–18. The budget is based on a WTI oil price assumption of USD 42/barrel (bbl) in 2016–17, rising to USD 54/bbl in 2017–18 and USD 64/bbl in 2018–19. While DBRS acknowledges that the pace of debt growth is somewhat slower than what was anticipated in January 2016, the debt burden is still expected to rise beyond a level considered acceptable for the previous AAA rating.

For 2015–16, the budget deficit is estimated to be $6.4 billion. On a DBRS-adjusted basis, after recognizing capital expenditures as incurred, this equates to shortfall of $10.6 billion, or 3.2% of GDP. The fiscal shortfall is then budgeted to rise to $10.4 billion in 2016–17, or $15.0 billion on a DBRS-adjusted basis (4.7% of GDP), after which it is projected to decline in the outer two years of the plan. DBRS notes that there is no return to balance forecast over the fiscal planning horizon through 2018–19, which raises concerns about the government’s willingness to address its structural deficit, even as oil prices are assumed to return to USD 64/bbl by the end of the forecast horizon. The Minister of Finance has suggested that deficits may continue until 2024.

Total spending is projected to increase by 3.6% in 2016–17, and grow by more than 4.0% annually in the outer two years of the plan. Key drivers include modest growth in program spending as the government aims to protect frontline services in health and education, capital grants to municipalities and the broader public sector, climate-related investments, and notably higher debt servicing costs related to the rising debt burden. The government also introduced a new Alberta Child Benefit to augment new federal benefits, as well as a carbon tax rebate for low-income individuals.

Meanwhile, revenues are budgeted to contract by 3.6% this fiscal year, followed by relatively brisk growth of 8.7% in 2017–18 and 10.3% in 2018–19, underpinned by a rebound in non-renewable resource royalty revenues, as well as broad-based tax gains, including the recently announced carbon levy. The carbon tax is expected to generate $2.4 billion by 2018. Proceeds are to be spent on climate-related initiatives, rendering it fiscally neutral. The small business tax rate is also to be reduced by one percent to 2% in 2017. The assumption of a rebound in resource royalties and other taxes presents some downside risk to the revenue forecast, should oil prices remain lower for longer or the economy underperform expectations. The budget forecast for both nominal and real GDP growth are largely consistent with the private-sector consensus tracked by DBRS.

The Stable trend reflects the still-considerable financial flexibility the Province has at this lower rating category to withstand further economic and fiscal deterioration. Furthermore, Alberta’s debt burden is expected to remain relatively low in relation to provincial peers.

The projections in this press release reflect a preliminary analysis of the fiscal plan. DBRS will complete a formal in-depth review of the Province and full report on the credit in the coming months.

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.

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