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

DBRS Limited (DBRS Morningstar) 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 Morningstar also confirmed the Long-Term Obligations rating of Alberta Capital Finance Authority at AA. The trends on all ratings are Negative.

The rating confirmations reflect DBRS Morningstar’s view that the credit profile is increasingly likely to stabilize in the AA rating category. However, DBRS Morningstar has maintained the Negative trend because (1) risks remain skewed to the downside and (2) the United Conservative Party (UCP) government has yet to demonstrate its ability to meet its fiscal policy objectives.

Alberta’s 2019–20 budget was presented in late October and outlines how the new UCP government plans to reconcile its competing policy objectives and plots a path back to balance. For 2019–20, the Province forecasted a deficit of $8.7 billion after incorporating a $680 million contingency and a $1.5 billion provision for the divestment of its crude-by-rail program. On an adjusted basis (post-capital expenditure and excluding the non-recurring items), this equates to a shortfall of $8.2 billion, or 2.3% of GDP. Over the medium term, the Province intends to steadily reduce the budget deficit, until the budget is balanced in 2022–23. With a faster track to balance the budget and a reduced capital program, debt growth should slow, although debt-to-GDP ratios are largely unchanged with the weaker outlook for economic growth. Adjusted debt-to-GDP is forecast to rise to 23.5% in 2019–20 and to peak around 26.0% in 2022–23.

The UCP government has put forward an ambitious plan with considerable implementation risk. The plan requires significant expenditure restraint, including a reduction in public-sector employment, it makes no provisions for wage and salary increases, and it reduces capital spending. Achieving this may prove politically and operationally difficult considering the Province’s young, fast-growing population, increasing service demands, and most collective bargaining agreements coming up for renewal next year. Notwithstanding these challenges, the government does appear strongly committed to balancing the budget over the stated timeframe and has signalled that it is prepared to make further adjustments to keep the plan on track if downside risks materialize.

Alberta’s economic outlook remains challenging and growth will remain uneven in the near term. While the outlook has improved modestly with past policy interventions and steady demand growth, the medium-term outlook remains challenged by transportation and infrastructure bottlenecks, provincially mandated production curtailments, regulatory uncertainty, and strong competition from U.S. oil and gas producers. The Province forecasts modest real GDP growth of 0.6% in 2019 and stronger growth of 2.7% in 2020 as oil production curtailment measures are eased. The 2020 forecast is stronger than the private-sector consensus tracked by DBRS Morningstar.

RATING DRIVERS
DBRS Morningstar has increased confidence that the Province’s credit profile is likely to stabilize in the current rating category. DBRS Morningstar could restore the trend to Stable following the next budget, provided there is policy continuity and demonstrated progress toward achieving the government’s stated fiscal and debt targets. A negative rating action could arise from a material deterioration in the fiscal and economic outlook.

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

The principal methodologies are Rating Canadian Provincial and Territorial Governments and Global Methodology for Government Related Entities, 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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar 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 [email protected].

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