DBRS Morningstar Confirms the Province of Prince Edward Island at “A” and R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Prince Edward Island (PEI or the Province) at “A,” as well as the Short-Term Debt rating at R-1 (low). All trends are Stable. The ratings remain underpinned by the longer-term outlook for the Province's economy and the government's ongoing commitment to responsible fiscal policy.

PEI's economy has been significantly affected by the Coronavirus Disease (COVID-19) pandemic. While PEI has had relatively few cases of coronavirus, the pandemic has had a significant impact on the provincial economy and the province's finances. The Province expects the economy to contract by 5.1% and unemployment to rise to 10.2% in 2020.

Against this backdrop, PEI projects a budget deficit of $172.7 million for 2020–21, which equates to a DBRS Morningstar-adjusted deficit of $286 million (-4.0% of GDP). The deterioration stems from a modest decline in own-source revenue and a significant increase in government spending and capital investment. Spending growth reflects underlying base budget pressures, many new budget initiatives reflecting the priorities of the government and opposition parties, and various pandemic-related initiatives.

The Province presented a high-level, multi-year budget outlook which envisions a multi-year effort to balance the budget. With few details contained in the budget, the outlook suggests that the Province will take a similar approach to balancing the budget as it did after the financial crisis (i.e., constrain spending growth to less than revenue growth).

PEI's DBRS Morningstar-adjusted debt (tax-supported debt and unfunded pension liabilities) is projected to rise to $3.4 billion in 2020–21, while adjusted debt-to-GDP ratio will rise to 47.2% in 2020–21. This is a significant reversal of recent trends that saw the debt-to-GDP ratio fall to 39.3% in 2018–19. Based on the multi-year budget outlook, DBRS Morningstar estimates that the debt-to-GDP ratio will fall modestly over the subsequent two years to about 45%.

RATING DRIVERS
The ratings remain strongly placed in the “A” category. A negative rating action could result from some combination of persistent economic weakness, large operating deficits, and further deterioration in the debt-to-GDP ratio beyond current expectations (above 50%). A positive rating action would require a significant rebound in economic activity paired with a sustained recovery in operating results and for the debt-to-GDP ratio to fall below pre-pandemic levels.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Canadian Provincial and Territorial Governments (May 13, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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