DBRS Confirms New Brunswick at A (high) and R-1 (middle), Changes Trend to Negative

DBRS Limited (DBRS) 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 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. All trends have been revised to Negative from Stable. The trend change reflects the slow, but sustained, deterioration in the Province’s credit profile over the past decade and a weak outlook for the economy and budgetary results in the future. Despite concerted efforts by successive governments to contain spending growth, boost revenues and stimulate the economy, the fiscal recovery plan continues to be delayed as evidenced by New Brunswick’s 2018 budget. With limited capacity and willingness to increase revenues or further constrain spending, DBRS believes this leaves the Province vulnerable to unforeseen shocks.

New Brunswick’s 2018 budget once again delays the return to balance in favour of new spending ahead of the September 2018 provincial election. During the last campaign, Brian Gallant and the Liberal Party campaigned on returning to balance in 2018–19; however, the latest iteration of the fiscal plan now suggests a return to balance in 2021–22. Although just a one-year delay, relative to last year’s plan, this represents a cumulative increase in deficits of $271 million over the coming three years, highlighting the weakening of fiscal resolve. The fiscal plan, as presented, suggests that the debt-to-gross domestic product (GDP) ratio may decline modestly to 43.0% by 2021–22, assuming continued growth in nominal GDP, a relatively stable capital program and adherence to fiscal targets. While DBRS previously stated that a stabilization of the debt burden would be necessary to prevent a negative rating action, DBRS questions the credibility of the current fiscal plan, given the lack of flexibility to respond to unforeseen pressures or fund new programs that are likely to arise as a result of campaign commitments in the upcoming fall election. There is limited capacity to raise taxes or further constrain spending, meaning that any deterioration in the economic outlook or new spending commitments will result in higher debt.

Based on preliminary results, the Province is projecting a deficit of $115.2 million in 2017–18, compared to an originally budgeted deficit of $191.9 million. On a DBRS-adjusted basis, this equates to a shortfall of $240.0 million or 0.7% of GDP. Despite exceeding budget expectations, this marks negligible improvement from 2016–17 as New Brunswick continues to grapple with a persistent budgetary gap even having undertaken past tax increases and years of expenditure restraint. DBRS-adjusted debt is projected to have grown by $596.7 million, or 3.9%, in 2017–18. This exceeded expectations slightly, pushing the debt-to-GDP ratio to 44.5%, up from 44.3% in 2016–17.

The outlook for the economy remains weak. New Brunswick’s budget is based on a real GDP growth forecast of 1.1% in 2018 and 0.9% in 2019. Over the medium term, the Province is anticipating real growth of just 0.7% annually between 2020 and 2022. Near-term risks include the ongoing NAFTA renegotiations, with food products and lumber potentially the most exposed sectors for the Province. Over the medium term, demography is the key challenge, as the population continues to age, and population growth is expected to remain slow, limiting labour force growth and potential output. In addition, unlike other Maritime Provinces, there has been a lack of large investment projects to stimulate growth. Beyond the Port of Saint John modernization project (a primarily public-funded project), there are no other major capital projects, public or private, currently under consideration resulting in weak investment outlook.

RATING DRIVERS
Absent a significant improvement in the fiscal and economic outlook that is viewed as sustainable by the time of DBRS’s next review, this would likely lead to a one-notch downgrade. In contrast, restoration of the Stable trend would require a meaningful improvement in the fiscal and debt outlook combined with an increased comfort that there is greater ability to absorb unforeseen shocks.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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 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 under Related Documents or by contacting us at info@dbrs.com.

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

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.