DBRS Confirms Province of Newfoundland and Labrador at A (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of Newfoundland and Labrador (Newfoundland or the Province) at A (low), as well as its Long-Term Debt and Short-Term Debt ratings at A (low) and R-1 (low), respectively. DBRS has also confirmed the Guaranteed Long-Term Debt rating of Newfoundland and Labrador Municipal Financing Corporation at A (low) and the Guaranteed Long-Term Debt and Guaranteed Short-Term Debt ratings of Newfoundland and Labrador Hydro at A (low) and R-1 (low), respectively. All trends remain Stable. The rating confirmations are based on DBRS’s view that credible action is being taken by the current government to address the large fiscal imbalance, which should gradually slow debt growth and enable financial metrics to remain within an acceptable range for the current ratings. However, commodity price uncertainty and yet unproven fiscal discipline present downside risks to the outlook.

A deficit of $2.2 billion was reported in the 2015–16 fiscal year, which is considerably weaker than the $1.1 billion shortfall originally forecast. On a DBRS-adjusted basis, after including capital expenditures as incurred rather than as amortized, this equates to a shortfall of $2.3 billion, or 7.8% of gross domestic product (GDP), marking the largest deficit incurred by any province since at least the early 1990s. As a result, the debt-to-GDP ratio grew sharply to 48.2% from 31.4% in 2014–15.

The economy has already been heavily affected by the oil price correction, and as major investment projects near completion, the economic outlook is expected to remain challenging. At the time of the budget, real GDP was estimated to grow by 1.0% in 2016; however, the recent second-quarter update lowered the forecast to 0.6% and pointed to a contraction of 4.5% in 2017.

The 2016–17 budget, presented in April 2016, forecast a deficit of $1.8 billion. On a DBRS-adjusted basis, this equates to a shortfall of $1.9 billion, or a very sizable 6.4% of GDP. Encouragingly, the second-quarter fiscal update, released on October 27, 2016, shows that fiscal performance is tracking somewhat ahead of budget, driven primarily by higher oil prices and production. Over the medium term, the fiscal plan comes with considerable uncertainty and is dependent on the future direction of oil prices along with the Province’s ability to achieve spending-reduction targets. Deficits are expected to remain sizable at 3.0% of GDP or above (DBRS adjusted) through 2020–21 before declining thereafter. This is likely to contribute to steady increases in debt, potentially exceeding 65.0% of GDP by 2022–23, which remains within an acceptable range for the current ratings. Additional federal loan guarantees recently announced for the Muskrat Falls hydroelectric development will help to mitigate the impact of cost overruns on provincial tax-supported debt.

RATING DRIVERS
Should oil prices fail to recover as anticipated or should fiscal targets not be adhered to, resulting in an increase in debt materially above the range considered acceptable for an “A”-range province, this could have negative rating implications.

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 (May 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2016), which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.