DBRS Confirms Province of Alberta at AA and R-1 (high), Maintains 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 also confirmed the Long-Term Obligations of the Alberta Capital Finance Authority at AA. The trends on all ratings remain Negative.

The confirmations are based on Alberta’s 2018-19 Third Quarter Fiscal Update and Economic Statement released on February 27, 2019, which now forecasts a deficit of $6.9 billion for 2018-19 – a marked improvement from the budgeted deficit of $8.8 billion – largely because of higher resource revenues. On a DBRS-adjusted basis, after including capital expenditures as incurred rather than as amortized, this equates to a shortfall of $9.5 billion or 2.7% of gross domestic product (GDP).

Alberta’s Election Act requires that an election be held between March 1, 2019, and May 31, 2019. A Throne Speech is scheduled for March 18, 2019, with some speculation that the writ of election could be issued in the following days or weeks. The more substantive Third Quarter Fiscal Update, which now includes a multi-year outlook, suggests that the government may not table a budget before the election. In light of Alberta’s uncertain political and fiscal policy outlook, DBRS will conduct a follow-up review of the Province once a government is sworn in and has presented its fiscal plan and objectives.

Total revenues are forecast to be $1.7 billion ahead of plan in 2018-19, driven by higher resource royalties. The revenue forecast is now predicated on an average West Texas Intermediate oil price assumption of USD 62/barrel (bbl) in 2018-19, up from USD 59/bbl, and a light-heavy oil differential of $23.50 compared with $22.40 at the time of the budget. Despite a significant widening of the oil price differential in fall 2018, prices received by Alberta producers have improved dramatically, in part because of government policy measures, including production curtailment.

Total expenditures are forecast to be $0.4 billion above budget, largely as a result of increased operating expenses across a range of ministries, disaster assistance costs and higher pension provisions.

The third-quarter update also included a multi-year fiscal outlook – usually reserved for budget updates – which maintains the government’s previously announced target to return to balance by 2023-24. Despite an improved revenue forecast, the outlook for deficits has softened relative to that presented last year.

Alberta’s DBRS-adjusted debt burden continues to rise with debt-to-GDP forecast to reach approximately 20.0% by March 31, 2019, up from 18.7% at March 31, 2018. The outlook suggests further increases in debt, though the path and peak remain uncertain, given the volatility in resource prices and the uncertain policy outlook.

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 Rating Canadian Provincial Agents of the Crown, which can be found on dbrs.com under Methodologies & Criteria.

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.

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