DBRS Confirms Province of Nova Scotia at A (high) and R-1 (middle), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of Nova Scotia (Nova Scotia or the Province) at A (high), along with the Long-Term Debt and Short-Term Debt ratings at A (high) and R-1 (middle), respectively. The trends on all ratings are Stable, supported by the Nova Scotia’s sound fiscal outlook, which has helped to place the debt burden on a downward trend. This is tempered by below-average economic growth potential, which will slow the rate of improvement in credit metrics.

Nova Scotia’s fiscal performance stands out relative to provincial peers having reported a deficit of just $10.7 million in 2015–16. On a DBRS-adjusted basis, recognizing capital expenditures as incurred rather than as amortized, this equates to a shortfall of $48.2 million, or just 0.1% of gross domestic product (GDP). This notably exceeds expectations from the time of DBRS’s last review, largely on account of better-than-planned expenditure management. As a result, the debt-to-GDP ratio declined to 36.6% from 37.0% in 2014–15 and represents the lowest debt burden among Atlantic Provinces and the fourth lowest of all provinces.

For 2016, the Province has assumed real GDP growth of 0.9%, although this has been revised up to 1.3% as of the first quarter update. For 2017, the Province’s latest forecast points to real GDP growth of 1.2%. While the improvement is encouraging and aided by federal fiscal stimulus, the demographic outlook will remain challenging due to an aging population and declining labour force. This is likely to dampen growth potential over the medium to longer term, absent a substantial improvement in productivity.

Nova Scotia continues to demonstrate sound fiscal management. For 2016–17, the budget forecasts a surplus of $127.4 million. On a DBRS-adjusted basis, this equates to a shortfall of $75.6 million, or just 0.2% of GDP. Total DBRS-adjusted revenues are projected to grow by 3.5% based on modest economic growth assumptions and limited new tax measures. Meanwhile, the Province continues to exercise expenditure restraint while providing modest funding increases for targeted platform commitments resulting in spending growth of 3.8%. Over the medium term, the forecast points to the continuation of a near-balanced position on a DBRS-adjusted basis through 2019–20 and represents one of the more favourable fiscal outlooks amongst the provinces. As a result, debt growth is expected to average less than 1% annually, which should be sufficient to gradually lower the debt-to-GDP ratio toward 34.0% by 2019–20.

RATING DRIVERS
Although no ratings movement is anticipated in the near term, a positive rating action would be dependent on sustained fiscal discipline, meaningful debt reduction and a sustained improvement in the economic outlook. Alternatively, a negative rating action could arise from a relaxation in fiscal discipline or sizable 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 DBRS Criteria: Guarantees and Other Forms of Support, which can be found on our website under Methodologies.

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

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.