DBRS Confirms New Brunswick at A (high) and R-1 (middle)

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt rating of the Province of New Brunswick (New Brunswick or the Province) at A (high). The Short-Term Debt rating has also been confirmed at R-1 (middle). Concurrently, the Guaranteed Long-Term Liabilities and Guaranteed Short-Term Liabilities ratings of New Brunswick Municipal Finance Corp. have been confirmed at A (high) and R-1 (middle), respectively. The trend on all ratings is Stable, as the Province’s fiscal recovery plan introduced last year remains on track and is expected to stabilize the debt burden. However, DBRS reiterates that there is limited flexibility within the current ratings to withstand any deterioration in the fiscal and debt outlook without negatively affecting the ratings.

New Brunswick’s preliminary results revealed a better-than-expected $231 million shortfall for 2016–17. On a DBRS-adjusted basis, after making adjustments to recognize capital spending as incurred, this equates to a deficit of $302 million, or 0.9% of gross domestic product (GDP), and represents the best fiscal result since 2006–07. As a result, debt-to-GDP rose to 44.8% from a restated 44.1% a year earlier. The restated debt ratio reflects accounting changes related to the recognition of pension plan obligations and the consolidation of nursing homes, as announced in the Province’s 2015–16 Public Accounts.

New Brunswick’s 2017–18 budget presented on February 7, 2017, reveals that the multi-year plan introduced last year to gradually restore balance by 2020–21 remains on track. For 2017–18, a deficit of $192 million is projected, which equates to a DBRS-adjusted shortfall of $327 million, or 1.0% of GDP. With no new measures introduced this year, total DBRS-adjusted revenues are forecast to grow by 4.2%. Meanwhile, DBRS-adjusted spending is projected to rise by 4.4%, which largely reflects ordinary inflationary and volume pressures as well as additional federal transfers for infrastructure and health care. Based on the medium-term plan, DBRS-adjusted deficits of 1.0% of GDP or less are anticipated from 2018–19 through 2020–21. Assuming very modest growth in nominal GDP, this points to a stabilization in the debt-to-GDP ratio around 46.0% before gradually trending downward in the outer two years of the plan. DBRS had previously indicated that a debt ratio above 45.0% of GDP would likely have negative rating implications. Given that fiscal performance remains on track with expectations and that the debt burden is expected to stabilize, DBRS does not view the higher-than-expected debt burden (as a result of accounting changes related to last year’s public accounts) as cause for negative rating actions.

The economic growth outlook remains weak but has improved relative to expectations at the time of last year’s review. The Province has forecast real GDP growth of 0.6% in 2017 followed by 0.8% in 2018 — close to the current private-sector consensus. The improving growth outlook for Central Canada and steady U.S. growth bode well for New Brunswick, but these are offset by uncertainties surrounding U.S. trade policy and the Province’s yet-to-be-announced carbon-pricing strategy.

RATING DRIVERS
New Brunswick’s ratings are unlikely to experience upward pressure in the near term. However, DBRS will closely monitor New Brunswick’s fiscal and economic performance over the coming months for any signs of softening fiscal resolve or weakening economic conditions. Any failure to demonstrate continued improvement in fiscal performance or stabilization of the debt burden, as currently expected, would likely have negative implications for both the long- and short-term ratings.

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 DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com 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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.