DBRS Morningstar Confirms the Province of Newfoundland and Labrador’s Ratings at A (low), Negative Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Newfoundland and Labrador (Newfoundland or the Province) at A (low) and confirmed the Short-Term Debt at R-1 (low). Concurrently, DBRS Morningstar confirmed the Guaranteed Long-Term Debt and Guaranteed Short-Term Debt of Newfoundland and Labrador Hydro at A (low) and R-1 (low), respectively.

The trends on all long-term ratings remain Negative while the trends on all short-term ratings remain Stable, where they were placed on June 17, 2020 (see “DBRS Morningstar Confirms the Province of Newfoundland and Labrador’s Ratings at A (low), Negative Trend, and Removes from Under Review with Negative Implications”). The trend change was a result of deteriorating global economic conditions and a sharp decline in global oil prices caused by the effects of Coronavirus Disease (COVID-19), which has had a profound impact on Newfoundland’s economy and public finances.

Since the last rating action, a new Liberal leader and Premier, Andrew Furey, was selected in August 2020, and Newfoundland introduced its 2020 budget on September 30, 2020. Newfoundland is projecting a deficit of $1.8 billion in 2020–21. This equates to a DBRS Morningstar-adjusted deficit of $2.0 billion, or 6.7% of GDP, after making adjustments to recognize capital spending as incurred. While the forecast remains subject to considerable uncertainty, it reflects a reduction in own-source revenues resulting from the economic shutdown and precipitous drop in oil prices, as well as 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 a multiyear budget outlook. In preparation for the 2021 budget, Premier Andrew Furey created the Premier's Economic Recovery Team (PERT), led by Dame Moya Greene, tasked with reviewing Newfoundland's fiscal capacity, government expenditures, and providing options for economic and social diversification. An interim report is expected by February 28, 2021, with a final report by April 30, 2021. PERT is expected to provide recommendations to address Newfoundland's fiscal and economic challenges over the next three years, which will be used to inform new measures expected to be articulated in the 2021 budget.

With the deterioration in fiscal outlook, and contraction in nominal GDP, DBRS Morningstar estimates that the adjusted debt-to-GDP ratio may rise to approximately 70% in 2020–21. This marks an improvement from DBRS Morningstar's estimates in June 2020 that pointed to adjusted debt potentially exceeding 75% of GDP. DBRS Morningstar notes that this outlook remains subject to downside risks, including the outlook for commodity prices and the possibility that the full costs of the Muskrat Falls project are not recovered through the electricity rate base.

While the coronavirus pandemic has been much less severe in Newfoundland with the second-fewest positive coronavirus cases of all provinces, the significant oil price decline has had a profound impact on the local economy. The Province has estimated that real GDP will fall by 4.8% and nominal GDP will fall by 13.7% in 2020. The current private-sector consensus points to a more severe contraction in real GDP (-7.7%), but less severe contraction in nominal GDP (-11.9%).

RATING DRIVERS
DBRS Morningstar aims to resolve the Negative trends by the time of the next review. DBRS Morningstar could restore the Stable trends on the long-term ratings with increased clarity that adjusted deficits will begin to trend below 5.0% of GDP and debt stabilizes below 80% of GDP, or increased clarity around how costs related to Muskrat Falls will be recovered and the extent to which provincial subsidies will be necessary for electricity-rate relief. Conversely, a sustained deterioration in the provincial economy leading to a continuation of DBRS Morningstar-adjusted deficits above 5.0% of GDP and a debt-to-GDP ratio above 80% could lead to a one notch downgrade of the long-term ratings.

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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577