DBRS Confirms British Columbia at AA (high) with a Stable Trend; Ample Flexibility as Election Nears

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of British Columbia (British Columbia or the Province) at AA (high), along with its Long-Term Debt and Short-Term Debt ratings at AA (high) and R-1 (high), respectively. Concurrently, the Long-Term Obligations and Short-Term Obligations ratings of British Columbia Hydro and Power Authority are confirmed at AA (high) and R-1 (high), respectively, based on its status as an agent of the Crown.

The Stable trends are supported by British Columbia’s strong fiscal performance and a stable economic backdrop that continue to point to a declining debt-to-gross domestic product (GDP) ratio. British Columbia’s budget, presented on February 21, 2017, forecasts balanced budgets over the medium term and announced a mix of pre-election promises, consisting of tax relief and new spending, afforded by revenue improvements carrying forward from 2016–17. With an election scheduled for May 9, 2017, this budget is unlikely to be adopted, and recent polls indicate that the opposition New Democratic Party is ahead of the governing Liberals.

For the fiscal year ending March 31, 2017, the current forecast estimates a surplus of $1.5 billion. On a DBRS-adjusted basis, including capital spending as incurred, this equates to a shortfall of approximately $750 million, or a modest 0.3% of GDP — a better-than-expected result. DBRS-adjusted revenues grew by 7.6%, considerably more than expected on account of strong personal income tax and property transfer tax receipts, partly offset by weaker commercial Crown corporation earnings. DBRS-adjusted spending is also estimated to have risen by a solid 6.0% and reflects growth in health and education, housing policy initiatives introduced early in the year and substantial growth in capital expenditures — partly driven by increased federal infrastructure spending. Strong fiscal performance and steady economic growth has helped to reduce the debt-to-GDP ratio to 17.9%, from 18.9% in 2015–16.

British Columbia is once again expected to be among the provincial economic growth leaders with real GDP projected to grow by 2.1% in both 2017 and 2018 — roughly in line with the current private-sector consensus tracked by DBRS. While activity in the housing market is showing signs of slowing, a growing population and strong labour market are expected to support consumer spending, while a low Canadian dollar and steady U.S. growth should provide strength to exports. Nevertheless, uncertainty regarding U.S. trade policy poses a meaningful risk.

For 2017–18, the budget projects a small surplus of $295 million. This equates to a DBRS-adjusted shortfall of $2.3 billion, or less than 1.0% of GDP — still a very manageable outlook. For the subsequent two years, DBRS-adjusted deficits are expected to decline, reaching 0.7% of GDP by 2019–20, provided capital spending contracts as intended. As a result, the debt-to-GDP ratio is expected to decline slightly to 17.7% by the end of the fiscal-planning horizon. This level remains above the low of 15.2% recorded in 2008–09 but will leave British Columbia with the lowest debt burden among all provinces, following more substantive debt increases in neighbouring provinces.

Total revenues are expected to be relatively flat in 2017–18 as newly announced tax relief will offset growth in the tax base. Key revenue initiatives include a 50% reduction in Medical Services Plan premiums beginning January 1, 2018, for households earning up to $120,000; a gradual phase out of sales tax on electricity for businesses starting October 1, 2017; a reduction in the small business corporate income tax rate to 2.0% from 2.5% beginning April 1, 2017; and an increase in the property transfer tax exemption threshold for first-time homebuyers. If implemented, these initiatives will reduce revenues by $566 million in 2017–18 and $1.3 billion once fully implemented by 2018–19.

Expenditure growth is projected to be more robust, rising by 3.2% (DBRS adjusted) in 2017–18 as steady population growth continues to pressure caseloads in health, education and social services and the capital program ramps up to record levels, supported by increased federal funding. The increase is partly driven by the Economic Stability Dividend — a one-time retroactive payment to all labour groups made when economic growth exceeds the average projection of British Columbia’s Economic Forecast Council. This was negotiated as part of the Province’s last public-sector bargaining mandate. In addition, there are also targeted increases being made to address youth mental health, fund increased enrolment in primary education and negotiated investments in school funding as part of a previous court decision and increases in social assistance rates and support for child welfare. With no major labour contracts up for renewal until 2019–20, there is an element of predictability to expenditure forecasts. Meanwhile, tax-payer-supported capital spending is projected to reach $4.8 billion, up 16.5% from 2016–17, with sizeable increases planned for transportation.

It is anticipated that a new budget will be presented in the summer or fall, at which time DBRS will provide a full report with analytical detail.

RATING DRIVERS
Although no rating movement is anticipated in the near term, DBRS would consider a positive rating action if 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 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 principal methodologies are Rating Canadian Provincial Governments and Rating Canadian Provincial Agents of the Crown, which can be found on dbrs.com under Methodologies.

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

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.

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