DBRS Morningstar Confirms Province of Newfoundland and Labrador’s Ratings at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Province of Newfoundland and Labrador’s (Newfoundland or the Province) Issuer Rating and Long-Term Debt rating at A (low) and the Short-Term Debt rating at R-1 (low). Concurrently, DBRS Morningstar confirmed Newfoundland and Labrador Hydro’s Guaranteed Long-Term Debt at A (low) and Guaranteed Short-Term Debt at R-1 (low). The trends on all ratings are Stable.

Newfoundland released its 2022 budget on April 7, 2022, which continues to show an improving fiscal outlook relative to prior expectations, supported by stronger commodity prices and ongoing expenditure restraint. The Province is forecasting a deficit of $346 million for 2022–23, a modest improvement from the $395 million shortfall estimated for 2021–22. On a DBRS Morningstar-adjusted basis, this equates to a shortfall of $535 million, or 1.3% of GDP after making adjustments to recognize capital spending as incurred. Over the medium term, Newfoundland projects its deficit to fall gradually before returning to a small surplus by 2026–27, or possibly sooner if the oil risk adjustment is not needed. The plan remains subject to implementation risk amid slowing global growth and high inflation, but the government has demonstrated it can make difficult choices in the face of challenging circumstances.

Based on continued fiscal progress and growth in nominal GDP, DBRS Morningstar estimates the adjusted debt-to-GDP ratio will fall to 55.6% in 2022–23 and remain in a range of 55.0% to 60.0% through 2026–27. While it’s still the highest debt ratio of all provinces by far, this marks considerable improvement from DBRS Morningstar's estimates in June 2020, which pointed to adjusted debt potentially exceeding 75% of GDP.

For 2022, the Province anticipates real GDP growth of just 0.5%, as increased mineral production and tourism spending is offset by further declines in oil production. This appears conservative in relation to the current private-sector consensus, which points to real growth of 1.9% in 2022. The Province forecasts real GDP growth averaging 2.4% between 2023 and 2026. The forecast remains subject to considerable uncertainty given persistently high inflation, signs of slowing global growth, and lower commodity prices.

RATING DRIVERS
A positive rating action would depend on a combination of (1) the conclusion of the Muskrat Falls agreement in principle and confidence that project costs will be fully recouped through the rate base, (2) continued fiscal improvement, and/or (3) the debt-to-GDP ratio returning to pre-pandemic levels. Conversely, a negative rating action now appears less likely but could arise from material underperformance of current expectations that leads to adjusted deficits trending above 5.0% of GDP and a debt-to-GDP ratio above 80%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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 methodologies are Rating Canadian Provincial and Territorial Governments (June 1, 2022; https://www.dbrsmorningstar.com/research/397817) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), 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).

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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