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 and Short-Term Debt ratings of Newfoundland and Labrador Hydro at A (low) and R-1 (low), respectively. All trends remain Stable. The ratings confirmation reflects DBRS’s view that the considerable progress being made to reduce budgetary deficits and slow debt growth are sufficient to maintain financial metrics within an acceptable range for the current ratings. An uncertain outlook for global commodity prices and continued cost overruns at the Muskrat Falls hydroelectric project present downside risks.

Preliminary results show the Province recorded a better-than-expected deficit of $1.1 billion in 2016–17. On a DBRS-adjusted basis, this equates to a shortfall of $1.6 billion, or 5.3% of gross domestic product (GDP). Total revenues are estimated to have grown sharply by 22.7% with the introduction of significan tax increases and a partial recovery in offshore oil royalties. The unexpected incremental offshore oil revenue enabled the Province to outperform its budget target. This contained debt growth to 4.0%, resulting in a debt-to-GDP ratio of 50.4%, up from 48.2% in 2015–16.

For 2017–18, the budget forecasts a deficit of $778 million, which equates to a DBRS-adjusted shortfall of $982 million, or 3.2% of GDP. Following last year’s extensive tax increases, no further increases were announced, and total revenues are forecast to be relatively flat. However, the Province continues to move forward with expenditure restraint measures aimed at bringing the level of per capita spending in line with the average of its Atlantic Canadian peers. As a result, total DBRS-adjusted spending is budgeted to decline by 6.8% in 2017–18.

Over the medium term, the Province’s plan points to a steadily declining deficit until balance is achieved in 2022–23, which suggests DBRS-adjusted debt will reach approximately 55% of GDP in 2018–19 before potentially declining slowly thereafter. This marks a considerable improvement from the potential peak debt burden of 65% of GDP foreseen at the time of DBRS’s last review and remains within an acceptable range for the current ratings. However, this outlook remains subject to downside risks, including the Province’s ability and willingness to meet fiscal plan targets and the rising costs at Muskrat Falls, which may need to be partly borne by the tax base.

For 2017, the Province has assumed that the economy will contract by 3.8% in real terms. This compares with the current private sector consensus tracked by DBRS, which shows a more modest 2.0% contraction. For 2018, the Province forecasts a further contraction in real GDP of 0.2%, with little improvement anticipated through the remainder of the forecast horizon to 2021. A continued moderation in capital investment, ongoing fiscal constraint and weak demographics will do little to stimulate growth.

RATING DRIVERS:
A negative rating action could result from a sustained deterioration in budgetary performance and material increase in debt beyond that considered acceptable for an “A”-range province. A positive rating action is unlikely in the current environment.

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.