DBRS Confirms Province of Alberta at AA and R-1 (high), Negative Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Alberta (Alberta or the Province) at AA, as well as its Short-Term Debt rating at R-1 (high). DBRS has also confirmed the Long-Term Obligations of Alberta Capital Finance Authority at AA. The trend on all ratings remains Negative. The ratings are supported by the Province’s low debt burden and improving economic outlook, while the Negative trends reflect the fact that Alberta continues to erode its low-debt advantage through sustained deficit spending and has yet to demonstrate meaningful action to address the fiscal imbalance.

For 2017–18, the Province now expects to record a deficit of $9.1 billion, which is an improvement over the budget forecast of $10.4 billion, largely because of stronger-than-anticipated revenues. On a DBRS-adjusted basis, after including capital expenditures as incurred rather than as amortized, this equates to a shortfall of $12.2 billion, or 3.6% of gross domestic product (GDP) — the largest deficit among all provinces. As a result, DBRS-adjusted debt is estimated to have grown by 30.3% year over year, or $14.4 billion. This boosted the debt-to-GDP ratio to 18.4% from 15.1% a year earlier.

Real GDP growth is expected to moderate in 2018 to 2.7%, with continued support from exports as oil production rises significantly, as well as through consumption and residential investment channels as the labour market continues to strengthen. However, heightened opposition to additional pipeline capacity remains a key downside risk to Alberta’s medium-term outlook and, depending on the outcome, is likely to have implications for longer-term investment intentions in the energy sector.

The 2018 budget marks Alberta’s first step in articulating a path back to balance by 2023–24. However, instead of outlining concrete and meaningful measures to tackle the structural deficit, the plan relies on a sustained economic recovery, rising oil prices and additional pipeline capacity to drive improvement in the bottom line. This ambitious outlook points to deficits of $8.8 billion in 2018–19, $7.9 billion in 2019–20 and $7.0 billion in 2020–21 before quickly moving to a small surplus by 2023–24. On a DBRS-adjusted basis, this equates to deficits of more than 2.0% of GDP for the next three years before falling to less than 1.0% of GDP by the outer years of the plan. As a result, the debt-to-GDP ratio will continue rising to roughly 25.0% by 2021–21 before potentially stabilizing thereafter. A moderation in the capital plan to more historical levels and lower transfers to municipalities will help to contain debt growth. However, given the high degree of uncertainty in the fiscal outlook, DBRS continues to question Alberta’s ability to stabilize its debt burden.

RATING DRIVERS
Adherence to the fiscal targets as currently presented and increased confidence that the government is committed to restoring balance and stabilizing the debt burden could lead DBRS to restore the Stable trends. In contrast, a failure to reduce the deficit as planned and an increase in debt beyond levels currently anticipated could lead to a one-notch downgrade of the ratings.

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.

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 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.