DBRS Morningstar Confirms the Province of Prince Edward Island at “A” and R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Prince Edward Island (PEI or the Province) at "A" as well as the Short-Term Debt rating at R-1 (low). All trends are Stable. The ratings remain underpinned by the longer-term outlook for PEI's economy and the government's ongoing commitment to responsible fiscal policy.

PEI's finances were relatively insulated from the widespread impacts of the Coronavirus Disease (COVID-19) pandemic because of substantial federal transfers and a brief period of restricted economic activity compared with other provinces. Based on provincial forecasts, DBRS Morningstar calculates adjusted deficit in F2021 to be $219.8 million (or -3.1% of GDP), which is better than DBRS Morningstar’s prior-year estimates of an adjusted deficit of $286 million (-4.0% of GDP). The Province expects economic growth and strict expense management to support the budget outlook. PEI anticipates a budget deficit of $112.2 million in F2022. On a DBRS Morningstar-adjusted basis, this equates to a shortfall of $209.4 million or -2.8% of GDP.

The Province included a high-level, multiyear outlook in its budget documents, which envisions material improvement in operating results by the 2023–24 fiscal year. Although the Province has not indicated a return to balance, it anticipates narrowing deficits in the two outer years ($45.7 million in F2023 and $27.9 million in F2024). While some downside risks may emerge subject to vaccine efficacy against the coronavirus variants and/or global economic uncertainty, DBRS Morningstar believes the Province's medium-term targets are achievable.

The DBRS Morningstar-adjusted debt (tax-supported debt and unfunded pension liabilities) for the Province is projected to rise to $3.5 billion in 2021–22, which translates to an adjusted debt-to-GDP ratio of 47.3%. Based on the multiyear budget outlook, DBRS Morningstar forecasts the debt-to-GDP ratio will gradually fall to 45.2% by year-end F2024 as the economy grows and debt increases at a slower pace.

RATING DRIVERS
The ratings remain strongly placed in the “A” category. A negative rating action could result from some combination of persistent economic weakness, large operating deficits, and further deterioration in the debt-to-GDP ratio to above 50%. A positive rating action would require sustained economic expansion coupled with a sustained recovery in operating results and for the debt-to-GDP ratio to fall below pre-pandemic levels.

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 methodology is Rating Canadian Provincial and Territorial Governments (May 3, 2021; https://www.dbrsmorningstar.com/research/377881), 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 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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