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

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) as well as its Short-Term Debt rating at R-1 (middle). Concurrently, DBRS confirmed the Guaranteed Long-Term Liabilities and Guaranteed Short-Term Liabilities ratings of New Brunswick Municipal Finance Corp. at A (high) and R-1 (middle), respectively. DBRS changed the trends on all ratings to Stable from Negative because of the meaningful improvement in the Province’s fiscal and debt outlook. While the economic outlook remains challenging, DBRS has greater confidence that the Province will deliver on its fiscal policy commitments and that operating results will evolve as forecast.

The 2019–20 budget is the first to be tabled by New Brunswick’s minority Progressive Conservative (PC) government, led by Blaine Higgs. The budget builds on earlier announcements, which have emphasized the need to put the Province’s finances on a sustainable long-term path. The Province forecasts a surplus of $23.1 million for 2019–20. DBRS makes adjustments to recognize capital spending as incurred rather than as amortized. As investment in tangible capital assets is set to decline by almost 30.0%, falling below amortization, this results in a positive DBRS-adjusted surplus of $71.8 million or 0.2% of gross domestic product (GDP).

Over the medium term, DBRS-adjusted surpluses are projected to rise gradually, reaching 0.4% of GDP by 2022–23. The revenue forecast appears modest and conservative, averaging 1.6% over the three outer years of the plan, while spending growth is forecast to average 1.5% over the same period. DBRS understands that the plan includes modest contingencies for wage and salary increases, disasters and other unplanned expenditures. The government appears intent on changing the culture within government and is seeking efficiencies to improve service delivery, support wage gains and other priorities. While the overall direction of fiscal policy appears to be positive, these objectives are ambitious and will require difficult decisions that may be challenging to implement.

New Brunswick’s debt-to-GDP ratio now appears to be firmly on a downward trend. DBRS-adjusted debt, defined as tax-supported debt net of sinking funds plus unfunded pension liabilities, is projected to fall to 41.9% of GDP in 2018–19 from 43.3% in 2017–18. Better-than-expected budget results and favourable revisions to historical nominal GDP by Statistics Canada have improved the outlook relative to DBRS’s expectations at the time of its last review. Based on the medium-term plan, the debt-to-GDP ratio is expected to continue trending downward, gradually reaching approximately 37.0% by 2022–23.

New Brunswick’s budget is based on a real GDP growth forecast of 0.6% in 2019 and 1.1% in 2020. The forecast incorporates the impact of reduced public-sector capital spending, ongoing fiscal restraint and a weaker growth outlook for key trade partners. The PC government campaigned on addressing New Brunswick’s weak economic outlook, which is expected to be a multi-year effort focused on supporting regional resource development; reducing the regulatory burden and interprovincial trade barriers; improving the sustainability of public finances to support business and consumer confidence; and providing tax relief, once affordable. However, this will take a sustained effort to increase the Province’s longer-term growth potential in light of weak population growth.

RATING DRIVERS
A positive rating action is highly unlikely in the near term; however, a rating downgrade could occur if any or a combination of the following occur: (1) a material underperformance of the current budgetary and debt outlook; (2) a material deterioration in economic conditions or (3) New Brunswick Power Corporation (NB Power) fails to demonstrate a continued reduction in leverage, causing DBRS to no longer treat NB Power as self-supported.

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 & 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.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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