DBRS Confirms Province of Newfoundland and Labrador at A (low), Stable Trend

DBRS Limited (DBRS) 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 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. While fiscal and economic conditions remain challenging for Newfoundland, the fiscal recovery plan remains on track, which is helping to contain debt growth and has contributed to a modest improvement in financial risk metrics.

For 2017–18, the deficit is estimated at $812 million compared with the $778 million shortfall originally anticipated. The variance reflects one-time severance costs of $37 million. Otherwise, actual results were on plan. On a DBRS-adjusted basis, the deficit is estimated at $1.0 billion, or 3.2% of gross domestic product (GDP). This represents the second-largest shortfall among provinces. As a result, the debt burden continued to rise, with debt-to-GDP reaching 51.2%, up from 48.3% in 2016–17.

The government remains committed to balancing the budget by 2022–23. Based on the medium-term outlook, the forecast points to DBRS-adjusted deficits hovering around 2.0% of GDP in 2019–20 and 2020–21 before approaching a near-balanced position by 2022–23. As a result, DBRS estimates that the debt-to-GDP ratio will rise to about 60% by 2020–21 before gradually declining thereafter. DBRS notes that this outlook remains subject to downside risks, including the outlook for commodity prices and the likelihood that the full costs of the Muskrat Falls project are not recovered through the electricity rate base. Nevertheless, the debt outlook remains within an acceptable range for the current ratings.

With mega projects such as Hebron and Muskrat Falls winding down and entering the production phase, their contribution to growth is expected to be muted in the coming years. Because of lower investment levels and employment at these projects, consumer spending and housing investment are likely to be negatively affected. Nevertheless, the economic outlook has improved modestly relative to last year’s plan, as stronger commodity prices remain supportive of production, and the decline in capital investment has been less significant than previously expected. For 2018, the budget is based on a contraction in real GDP of 0.8% before rebounding to 1.1% growth in 2019. This appears conservative in relation to the current private-sector consensus tracked by DBRS. Over the medium term, the outlook for commodity prices presents the greatest risk to economic activity in Newfoundland. In addition, the shrinking labour force will limit potential GDP growth.

RATING DRIVERS:
A negative rating action is not contemplated at this time, as there is ample room to withstand a deterioration in financial risk assessment metrics within the rating category. A positive rating action would be dependent upon a combination of continued fiscal discipline, a downward trending debt-to-GDP ratio and clarity around how costs related to Muskrat Falls will be absorbed by the electricity rate base and/or tax base.

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.