DBRS Morningstar Confirms Government of Nunavut’s Rating at AA (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Government of Nunavut’s (Nunavut or the Territory) Issuer Rating at AA (low) with a Stable trend. The rating is supported by the strong institutional framework that decouples the government’s finances from a weak underlying economy and results in stable government finances and a low debt burden. The Stable trend reflects DBRS Morningstar’s view that the Territory's credit fundamentals are unlikely to materially change as a result of the Coronavirus Disease (COVID-19) pandemic. Budgetary results are expected to remain manageable and the debt burden low.

Until recently, Nunavut had been successful at preventing the spread of the coronavirus in the Territory as a result of strong public health measures implemented at the start of the pandemic and because the Territory is only accessible by air, with the exception of the summer sealift. However, at the time of writing, the coronavirus pandemic is taking hold in Nunavut with 70 active cases spread across four communities: Arviat, Rankin Inlet, Sanikiluaq, and Whale Cove. In response, the Territory has implemented a mandatory two-week restriction period beginning November 18, 2020. While public health measures are having a widespread impact on Nunavummiut and the local economy, Nunavut's public finances are expected to benefit from the high reliance on federal transfers and extraordinary pandemic support. As a result, a dramatic increase in debt is not anticipated.

Given the arrival of the coronavirus in the Territory, Nunavut's budgetary situation continues to evolve. The government originally projected an operating deficit of $30.4 million in the 2020–21 budget presented on February 19, 2020. Although an updated forecast has yet to be presented, the government has indicated that a historically large deficit is anticipated. DBRS Morningstar makes adjustments to recognize capital spending as incurred rather than as amortized. Based on the original budget, a DBRS Morningstar-adjusted deficit of $60.8 million was anticipated but this is now likely closer to $100.0 million, or approximately 2.5% of GDP. This figure reflects DBRS Morningstar’s estimate of a reduction in own-source revenues and a material increase in expenses that will be only partially offset by increased federal support. While the government has yet to present an updated multi-year outlook, DBRS Morningstar believes that there is ample flexibility within the existing rating to withstand a temporary deterioration in operating performance.

As in other provinces and territories, the economic outlook has weakened since the onset of the pandemic in March 2020. For planning purposes, Nunavut uses the Conference Board of Canada’s economic forecast, which points to real GDP growth of 6.1% in 2020. DBRS Morningstar has assumed an annual increase in Nominal GDP 8.0% in 2020. Given the limited availability of health resources, Nunavut has taken a cautious approach to managing the pandemic and will likely be slow to reopen. Nevertheless, DBRS Morningstar expects that, as the effects of the pandemic subside, especially on the mining sector, the Territory is likely to return to a robust growth trajectory.

DBRS Morningstar projects Nunavut’s total debt will be $436.6 million as of March 31, 2021, down 2.7% from the previous year. Under the Nunavut Act, the federal government recently increased the Territory’s maximum amount of borrowing to $750 million from $650 million previously. Given the ongoing amortization of existing debt and the Territorial government’s funding of capital with cash on hand, cash from operations, and federal government contributions, DBRS Morningstar projects that Nunavut’s debt-to-GDP ratio will trend downward toward 9.0% by 2022–23. This compares very favourably with Canadian provinces.

RATING DRIVERS
No rating action is likely in the near to medium term. Downward rating pressure could result from a weakening of the institutional framework, while a positive rating action would require further economic diversification, a broadening of the tax base, and sustained strong fiscal performance.

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 trends 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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