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), respectively. All trends are Stable. The Province’s credit profile appears to have stabilized relatively quickly compared with many other provincial peers supported by past efforts to address fiscal imbalances and slow debt growth. While the ongoing evolution of global geopolitical conflict leads to heightened economic uncertainty (particularly in the form of increasing inflation), the use of realistic forecast assumptions, the recent track record of outperformance, strength in economies of key trading partners, and population growth will lend stability to the credit profile.

For the year ended March 31, 2022, New Brunswick estimates a surplus of $488 million, relative to a reported surplus of $409 million in the prior year. This contrasts with a budgeted deficit of $245 million in F2022, with the improvement driven by considerably stronger-than-expected revenues, while spending was only modestly above budget, largely reflecting a flow-through of federal monies. DBRS Morningstar makes adjustments to recognize capital spending as incurred rather than as amortized. This results in a DBRS Morningstar-adjusted surplus of $471 million, or 1.2% of GDP.

For 2022–23, the Province is forecasting a smaller surplus of $35 million. After making adjustments to recognize capital spending as incurred rather than as amortized, this equates to a DBRS Morningstar-adjusted deficit of $15 million. Over the medium term, the adjusted deficit is expected to remain below 0.5% of GDP. This is considered very manageable and remains favourable compared with what is expected for many provincial peers.

The Province forecasts net debt-to-GDP to be 31.9% in 2021–22, down from 35.8% in 2020–21. Over the medium term, DBRS Morningstar-adjusted debt-to-GDP is expected to decline to less than 30% through 2024–25 (versus a prior estimate of roughly below 41%). In recent years, the debt outlook has outperformed provincial projections given prudent assumptions, positive operating results, and effective fiscal management. This budget outperformance provides increased financial flexibility at the current rating level.

For 2022, New Brunswick is forecasting real GDP growth of 2.2% before moderating to 1.6% and 1.1% in 2023 and 2024, respectively. New Brunswick's economy has recovered quickly, supported by faster resumption of economic activity and population growth; however, DBRS Morningstar recognizes that there remain near- and medium-term risks to the outlook in the form of inflation, disruption in labour markets and supply chains (materials, transportation, etc.), exchange rates relative to key trading partners, and impacts from broader geopolitical conflicts and trade tensions.

RATING DRIVERS
A negative rating action could result from a sustained deterioration in operating results and a 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 Disease (COVID-19), a positive rating action was considered unlikely as the ratings were constrained by New Brunswick's weak economic fundamentals.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683) and the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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