DBRS Morningstar Confirms the Province of British Columbia at AA (high) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of British Columbia (B.C. or the Province) at AA (high) and the Short-Term Debt rating at R-1 (high). DBRS Morningstar also confirmed British Columbia Hydro and Power Authority’s Long-Term Obligations at AA (high) and Short-Term Obligations at R-1 (high). All trends are Stable. Concurrently, the Renminbi Bonds rating was discontinued as all Renminbi-denominated bonds have matured.

The confirmations reflect the underlying strength and diversity of the Province's economy and disciplined fiscal policy and management practices, and, when combined with considerable fiscal flexibility and a strong balance sheet, enables B.C. to withstand the anticipated deterioration in key financial risk metrics as presented in its 2021 budget, which was released on April 20, 2021.

For 2021–22, the Province is forecasting a deficit of $9.7 billion. On a DBRS Morningstar-adjusted basis, this equates to a deficit of $13.1 billion, or 4.2% of GDP, the largest shortfall since DBRS Morningstar began rating the Province in 1987. After having temporarily suspended its balanced budget requirement, and given heightened uncertainty surrounding the Coronavirus Disease (COVID-19) pandemic, B.C. has only provided a fiscal outlook until 2023–24. The Province projects deficits of $5.5 billion and $4.3 billion for 2022–23 and 2023–24, respectively. On a DBRS Morningstar-adjusted basis, these equate to deficits of 2.4% to 2.8% of GDP. While this outlook is weaker than that of several other provinces, the significant level of prudence leaves room for outperformance. The Province intends to present a detailed plan to restore balance in the February 2022 budget.

Despite rising debt due to a pandemic-driven deficit, B.C. continues to have one of the lowest debt burdens among provinces. In 2020–21, DBRS Morningstar-adjusted debt—defined as tax-supported debt and unfunded pension liabilities—rose by $12.8 billion, pushing the debt-to-GDP ratio to 20.0% from 15.0% the year prior. Over the medium term, DBRS Morningstar-adjusted debt is estimated to reach 22.1% of GDP in 2021–22 and approach 25.5% of GDP by 2023–24, but given conservative budgeting and the Province's track record of outperformance, the ultimate peak is likely to be somewhat lower. While current debt-to-GDP estimates now exceed original projections at the time of the last review and has eroded flexibility within the current ratings, DBRS Morningstar believes the plan, as presented, is manageable given its prudent assumptions.

For 2021, the Province anticipates real GDP growth of 4.4%, followed by 3.8% in 2022. Like other provincial budgets released this spring, this forecast is conservative relative to the private-sector consensus. Public health measures in B.C. have generally been less restrictive than most other parts of the country and the Province began a four-step reopening plan in late May 2021. The duration and intensity of the pandemic, ongoing vaccine rollout, and economic reopening will likely dictate the impact on consumer spending, business investment, and global trade through the near to medium term.

RATING DRIVERS
A negative rating action could result from a sustained deterioration in operating results and marked increased in the debt-to-GDP ratio beyond the current expectations.

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 Global Methodology for Government Related Entities (March 8, 2021; https://www.dbrsmorningstar.com/research/374948), 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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the 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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