DBRS Morningstar Confirms Province of New Brunswick at A (high), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of New Brunswick (New Brunswick or the Province) at A (high) and its Short-Term Debt rating at R-1 (middle). Concurrently, DBRS Morningstar confirmed the Guaranteed Long-Term Liabilities and Guaranteed Short-Term Liabilities ratings of New Brunswick Municipal Finance Corp. at A (high) and R-1 (middle), respective¬ly. All trends are Stable.

As a result of past efforts to address fiscal imbalances and slow debt growth, DBRS Morningstar expects the impact of the Coronavirus Disease (COVID-19) pandemic on the Province’s finances to be very manageable, with debt-to-GDP remaining below prior peaks. This is an enviable position in comparison with most provincial peers. As such, the overall outlook for the Province's credit profile remains intact.

For the year ended March 31, 2021, New Brunswick reported a deficit of $12.7 million. This is the best result among Canadian provinces, as increased federal government supports offset reduced own-source revenues and higher spending resulting from the pandemic. DBRS Morningstar makes adjustments to recognize capital spending as in¬curred rather than as amortized. As investment in tangible capi¬tal assets is below amortization, this results in a positive adjustment and a DBRS Morningstar-adjusted surplus of $30.9 million, or 0.1% of GDP.

For 2021–22, the Province is forecasting a deficit of $245 million. After making adjustments to recognize capital spending as incurred rather than as amortized and to incorporate additional federal funding announced subsequent to New Brunswick's 2021 budget, this equates to a DBRS Morningstar-adjusted deficit of $138 million, or a very manageable 0.4% of GDP. Over the medium term, the adjusted deficit is expected to remain below 1.0% of GDP.

New Brunswick has been spared from the dramatic increase in debt resulting from the coronavirus pandemic that many other provinces have experienced. Although DBRS Morningstar-adjusted debt-to-GDP is estimated to have risen to 42.0% in 2020–21, this increase is modest and driven entirely by the GDP shock rather than outright debt growth. Over the medium term, DBRS Morningstar-adjusted debt-to-GDP is expected to stabilize at 41.0% through 2023–24. This is a notably better outlook than DBRS Morningstar anticipated when it last confirmed the ratings in May 2020, thereby providing more flexibility at the current rating level. Furthermore, given conservative economic assumptions and a recent track record of outperformance, DBRS Morningstar anticipates that debt-to-GDP will likely decline further.

For 2021, New Brunswick is forecasting real GDP growth of 2.9% before moderating to 1.7% and 0.9% in 2022 and 2023, respectively. This forecast appears to be conservative relative to the current private-sector consensus of 4.6% for 2021, as the Province opted for increased prudence in light of ongoing uncertainty related to the coronavirus, the vaccine rollout, and continuing public health measures. While the ongoing evolution of the coronavirus pandemic leads to heightened economic uncertainty, the balance of risks appears tilted to the upside given the conservative forecast assumptions used, the likelihood of a faster-than-planned vaccine rollout, and materially stronger U.S. growth.

RATING DRIVERS
A negative rating action could result from a sustained deterioration in operating results and marked increase in the debt-to-GDP ratio beyond the levels outlined above and/or New Brunswick Power Corporation (NB Power) failing to reduce leverage, causing DBRS Morningstar to no longer treat NB Power as self-supported. Even prior to the coronavirus, a positive rating action was considered unlikely as the ratings were constrained by New Brunswick's weak economic fundamentals.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Canadian Provincial and Territorial Governments (May 3, 2021; https://www.dbrsmorningstar.com/research/377881) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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