DBRS Confirms the Province of Saskatchewan at AA and R-1 (high) with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt and Short-Term Debt ratings of the Province of Saskatchewan (Saskatchewan or the Province) at AA, AA and R-1 (high), respectively. All trends are Stable. DBRS has also confirmed the Long-Term and Short-Term Obligations (based on Province of Saskatchewan) ratings of Saskatchewan Power Corporation at AA and R-1 (high), respectively, with Stable trends (for more information, see the Saskatchewan Power Corporation rating report published on September 29, 2016).

The Province’s fiscal position and economy have been challenged by weaker commodity prices in recent years. However, DBRS believes that the Province’s plan to restore balance over the medium term is credible and will limit the further accumulation of debt. Saskatchewan’s ratings remain well supported by the relatively low debt burden, responsive fiscal policy and underlying potential of the Province’s economy.

The Province’s budgetary position deteriorated significantly during 2016–17, with preliminary results showing that the deficit widened to $1.3 billion from the planned deficit of $434.0 million. On a DBRS-adjusted basis, this equates to a deficit of $2.7 billion or 3.6% of gross domestic product (GDP). The deterioration was largely the result of significant declines in resource revenue and government business enterprises’ earnings, as well as from modest expense pressures arising from increased volume in health and social services and unexpected crop insurance claims.

The provincial economy is widely believed to have bottomed out in 2016, and economic indicators suggest the economy is now firmly recovering because of the steady, albeit modest, recovery in commodity prices. The Province is forecasting that the economy will expand by 0.8% in 2017. Initial economic data for 2017 suggests the recovery may be stronger than expected.

The Province’s 2017–18 budget presents a three-year plan to return to balance through immediate tax increases and extensive expense management, including the rationalization or elimination of specific programs/initiatives, broad-based spending restraint across ministries, grant reductions to broader public-sector entities and the target of negotiating a $250 million reduction in compensation costs. With these actions, the Province expects to halve the deficit in 2017–18 to $685 million ($1.6 billion on a DBRS-adjusted basis) and return to balance two years later. While DBRS believes the government and broader public-sector entities will face difficulties in achieving all of the targeted savings, DBRS does believe the three-year plan to return to balance is credible and coherent.

DBRS projects that the DBRS-adjusted debt burden will rise to 24.0% of GDP in 2017–18 and then gradually decline over the medium term to range between 20.0% and 23.0% of GDP.

A negative rating action could result from a sustained deterioration in the structure of and outlook for the provincial economy and a corresponding deterioration in budgetary balance and debt. A positive rating action would require a return to balance on a sustained basis, a significant reduction in the provincial debt burden and less economic volatility.

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.

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.