DBRS Morningstar Confirms the Province of Alberta at AA (low), Maintains Negative Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Alberta (Alberta or the Province) at AA (low), as well as its Short-Term Debt rating at R-1 (middle). The trends on both long-term ratings are Negative while the trend on the short-term rating is Stable.

Alberta has been affected by the dual shock of the Coronavirus Disease (COVID-19) pandemic and the precipitous drop in oil prices in spring 2020. This has resulted in a material deterioration in DBRS Morningstar's assessment of Alberta's financial risk assessment metrics, namely because of large, sustained deficits and rising debt. However, the impact of the coronavirus pandemic is expected to gradually subside, which will cause deficits to moderate and debt growth to slow. DBRS Morningstar will look to assess the pace and extent of the recovery, along with the provincial government's progress toward fiscal consolidation and endeavour to resolve the Negative trends at the time of its next review.

Like all provinces, the economic outlook has weakened since the onset of the pandemic in March 2020. Economic activity slowed sharply because of federally and provincially mandated shutdowns. Alberta is currently in the midst of a significant second wave of coronavirus which has led to increased public health measures. This has had a profound impact on the local economy, especially for the energy sector, accommodation and food services, wholesale and retail trade, and construction. The Province estimates that real GDP will fall by 8.1% and nominal GDP will fall by 12.9% in 2020. The Province has assumed a rebound in real GDP of 4.4% in 2021 and 3.6% in 2022, although a return to pre-pandemic levels is unlikely until 2023.

Given the significant contraction in economic activity and ongoing weakness in oil prices, the Province is forecasting a deficit of $21.3 billion in 2020¬–21, a modest improvement from the first quarter update which pointed to a $24.2 billion shortfall. This contrasts with a $7.3 billion deficit originally projected in late February 2020. On an adjusted basis, DBRS Morningstar anticipates a shortfall of $22.9 billion, or 7.5% of GDP.

After the Province articulated an ambitious plan to restore balance by 2022–23 in 2019, the coronavirus dramatically altered Alberta's fiscal landscape. The midyear fiscal update lays out Alberta's fiscal targets for the next three years. For 2021–22 and 2022–23, deficits of $15.5 billion and $9.9 billion are projected, which equate to DBRS Morningstar-adjusted shortfalls of 5.3% and 3.0% of GDP, respectively. While the government continues to emphasize its commitment to fiscal prudence, the plan entails con¬siderable implementation risk, especially given a growing population, increasing service demands, and an aggressive target to constrain public-sector compensation.

The outlook for debt continues to worsen. On an adjusted basis, DBRS Morningstar projects debt-to-GDP to reach 38% by 2022–23. This is a marked increase from DBRS Morningstar’s expectations when the ratings were downgraded in March 2020, when DBRS Morningstar anticipated debt-to-GDP rising above 30%. The multiyear forecast entails considerable uncertainty and it is unclear when, and at what level, the debt-to-GDP ratio will begin to stabilize. As a result, Alberta continues to use up flexibility in its current ratings.

RATING DRIVERS
Should the adjusted deficit-to-GDP remain above 5.0% for a sustained period, or should DBRS Morningstar lower its assessment of any critical rating factors by the time of the next review, a downgrade of the long-term ratings is possible. Changing the trend to Stable is dependent on a sustained improvement in the fiscal deficit, increased clarity about where the debt-to-GDP burden will stabilize, and no changes to critical rating factors.

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.

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].

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

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