DBRS Morningstar Confirms Province of Nova Scotia at A (high) and R-1 (middle), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Nova Scotia (Nova Scotia or the Province) at A (high) and confirmed the Province’s Short-Term Debt rating at R-1 (middle). Concurrently, DBRS Morningstar confirmed the Guaranteed Long-Term Debt and Guaranteed Short-Term Debt ratings of the Nova Scotia Municipal Finance Corporation at A (high) and R-1 (middle), respectively, and the Government Guaranteed Debt of the Nova Scotia Power Finance Corporation at A (high). All trends are Stable.

The Coronavirus Disease (COVID-19) pandemic has had a widespread impact on Nova Scotia's residents, local economy, and public finances. Despite the challenges posed by the coronavirus, at the beginning of the pandemic the Province was in a relatively strong position, with sound economic fundamentals, successive budget surpluses, and a gradually declining debt-to-GDP ratio. As such, although large deficits are anticipated and debt will rise, the impact is expected to be temporary and can be accommodated within the existing rating category.

Like all provinces, Nova Scotia’s economic outlook has weakened materially since the onset of the pandemic in March 2020. Economic activity slowed sharply because of federally and provincially mandated shutdowns. While the coronavirus pandemic has been much less severe in Atlantic Canada, Nova Scotia has experienced the highest number of total cases in the region, primarily in the early stages of the outbreak. This has had a profound impact on the local economy, especially for accommodation and food services, personal care, and retail trade. The Province has estimated that real GDP will fall by 6.0% and nominal GDP will fall by 5.5% in 2020. With growth set to resume in 2021, the Province forecasts that real GDP will rise by 4.8% and nominal GDP will rise by 6.9%. This forecast falls within the range of private-sector forecasts.

Nova Scotia is projecting a budget deficit of $852.9 million. This equates to a DBRS Morningstar-adjusted deficit of $1.5 billion, or 3.4% of GDP, after making adjustments to recognize capital spending as incurred. While the forecast remains subject to considerable uncertainty, the Province forecasts a material reduction in own-source revenues resulting from the economic shutdown and a significant increase in one-time expenditures to support households and businesses that have only been partially offset by increased federal transfers.

The Province has not provided an updated multiyear outlook, but DBRS Morningstar expects Nova Scotia will gradually reduce the budget deficit as the economy recovers and one-time spending measures are no longer required. Nevertheless, the resurgence of coronavirus across parts of Canada presents uncertainty to the fiscal outlook. DBRS Morningstar expects the government to release the next fiscal update in December and will look for increased clarity regarding the multiyear outlook and deficit-reduction targets at that time.

Based on the current outlook, the DBRS Morningstar-adjusted debt-to-GDP ratio is expected to reach 40.6% in 2020–21, before potentially moderating in subsequent years.

RATING DRIVERS
Downward pressure on the rating could arise from a sustained deterioration in fiscal per¬formance and material increase in debt beyond current expectations in conjunction with deterioration in critical risk factors. A positive rating action would be dependent on continued fis¬cal discipline and sustained economic improvement, leading to meaningful debt reduction.

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 methodologies are Rating Canadian Provincial and Territorial Governments (May 13, 2020) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 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 trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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