DBRS Morningstar Changes the Trend on the Province of Alberta to Stable from Negative, Confirms Ratings at AA (low)

DBRS Limited (DBRS Morningstar) changed the trends on the Issuer Rating and Long-Term Debt rating of the Province of Alberta (Alberta or the Province) to Stable from Negative. DBRS Morningstar confirmed the Issuer Rating and Long-term Debt rating at AA (low), as well as its Short-Term Debt rating at R-1 (middle). The trend on the short-term rating remains Stable.

At the time of DBRS Morningstar's December 2020 rating review of the Province, DBRS Morningstar indicated that changing the trend to Stable would depend 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. While the outlook remains subject to uncertainty, the Province's recent midyear update points to DBRS Morningstar-adjusted deficits remaining well below 5% of GDP and debt-to-GDP trending below 30% (DBRS Morningstar-adjusted). No critical rating factors have been changed and DBRS Morningstar believes that this material improvement in fiscal and debt outlook warrants a restoration of the Stable trends.

The 2021 budget forecast a deficit of $18.2 billion in 2021–22; however, the midyear update released on November 30, 2021, presents a much improved picture. The Province is now projecting a deficit of $5.8 billion in 2021–22. On a DBRS Morningstar-adjusted basis, this points to a shortfall of $7.5 billion, or 2.1% of GDP, compared with a deficit of 6.2% of GDP in 2020–21. Based on the revised multiyear outlook, DBRS Morningstar-adjusted deficits of 1.4% and 0.8% are now anticipated in 2022–23 and 2023–24, respectively, much improved from earlier expectations.

Alberta's debt outlook has also improved markedly from the initial 2021–22 budget. On a DBRS Morningstar-adjusted basis, debt-to-GDP is projected to fall to 31.2% in 2021–22 as the robust recovery in nominal GDP will more than offset continued debt growth. This compares with the anticipated debt-to-GDP of 37.2% when the February 2021 budget was presented. Over the medium term, adjusted debt-to-GDP is projected to fall to approximately 28.0% by 2023–24.

Although severely affected by the dual shock of the Coronavirus Disease (COVID-19) pandemic and significant decline in oil prices in 2020, Alberta's economy is now poised to recover sharply. For 2021, the Province now estimates that real economic growth will rebound to 6.1% in 2021, with growth ranging between 2.7% and 5.1% in the following three years. Nevertheless, the emergence of new coronavirus variants and rising cases demonstrate that the economic recovery is likely to remain choppy and the risk of volatile energy prices remains ever present.

RATING DRIVERS
A material reversal in the current outlook, with the adjusted deficit-to-GDP rising above 5.0% for a sustained period and adjusted debt exceeding 35% of GDP, and/or negative adjustments to any critical rating factors could result in a negative rating action. A positive rating action is not likely in the near term and would depend on a material improvement in financial risk assessment metrics beyond current expectations and/or improvement in critical rating factors.

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).

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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