DBRS Morningstar Confirms the Province of Saskatchewan at AA (low) and R-1 (middle), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and both the Long-Term Debt and Short-Term Debt ratings of the Province of Saskatchewan (Saskatchewan or the Province) at AA (low), AA (low), and R-1 (middle), respectively. All trends are Stable.

For the year ended March 31, 2022, the Province reported a deficit of $1.5 billion, compared with a shortfall of $1.1 billion in the prior fiscal year. On a DBRS Morningstar-adjusted basis, the deficit equates to $1.8 billion, or 2.1% of GDP.

The Province's budget outlook has materially improved, with the government anticipating a deficit of $463 million in 2022–23, compared with a shortfall of $1.5 billion in 2021–22. On a DBRS Morningstar-adjusted basis, DBRS Morningstar expects a shortfall of $0.8 billion (less than 1% of GDP). Budget priorities have not shifted materially as the government continues to focus on economic recovery in the backdrop of the pandemic and vacillating global geopolitical undercurrents. While the government has not projected a return to balance before 2026–27, it anticipates deficits will continue to decline. On an adjusted basis, the outlook suggests shortfalls will shrink to 1.0% of GDP or below through the medium term, and a return to balance may be swiftly achievable with further outperformance and as extraordinary pressures subside.

In line with DBRS Morningstar’s earlier projections, Saskatchewan's debt outlook remains manageable for the current ratings, although ongoing shortfalls and sizable capital needs will present challenges. The government projects the net debt-to-GDP ratio will be 18.8% in 2022–23 and has forecast this ratio to peak at 20.4% in 2025–26 before starting to decline thereafter. The DBRS Morningstar-adjusted debt-to-GDP ratio is anticipated to remain below 35% over the next three years.

Saskatchewan's economy contracted by 0.3% (preliminary data from Statistics Canada) in 2021, mainly driven by a significant drought event that negatively affected the agriculture industry in that Province. Over the medium term, Saskatchewan has forecast the pace of economic growth to moderate to an average of 2.1% annually. Major risks to the economic outlook remain linked to the emergence of new Coronavirus Disease (COVID-19) variants, rising inflation, geopolitical tensions, and the relatively high dependence on the primary sector, namely factors affecting pricing and production of oil, potash, and agricultural commodities.

RATING DRIVERS
The ratings are comfortably placed within the current rating category. While unlikely, a negative rating action could result from a combination of persistent economic weakness, large and sustained operating deficits, and material deterioration in the debt-to-GDP ratio. A positive rating action is not contemplated in the current environment but would require a rebound in economic activity paired with a recovery in operating results and the debt-to-GDP ratio.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Based on the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, DBRS Morningstar considers Emissions, Effluents, and Waste to have a relevant effect on the credit analysis and applies a negative overlay to reflect Saskatchewan's high greenhouse gas (GHG) emissions. While not the largest emitter among Canadian provinces, Saskatchewan’s GHG emissions are the second highest on a per capita basis. In 2020, GHG emissions were 65.9 megatonnes of carbon dioxide—a 46% increase from 1990, according to Environment and Climate Change Canada.

The E factor has changed from the prior rating disclosure; however, there is no change to the overall rating. At the time of the prior review, GHG emissions were marked as applicable to the credit analysis for Saskatchewan, though this is the first time they have been marked as relevant with high emissions per capita considered as modestly negative to the overall rating.

There were no Social/Governance factors 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 (June 1, 2022; https://www.dbrsmorningstar.com/research/397817) 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings).

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577