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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Alberta (Alberta or the Province) at AA (low), as well as its Short-Term Debt rating at R-1 (middle). Concurrently, DBRS Morningstar changed the trends on all ratings to Positive from Stable.

The Positive trends reflect a significant improvement in Alberta's fiscal and debt outlook, relative to DBRS Morningstar's previous expectations. This improvement has been supported by strong energy prices and the government's continued focus on returning the Province to a sustainable fiscal path. As indicated in the Province's first-quarter update released on August 31, 2022, Alberta plans to use the majority of expected revenue windfalls for material debt reduction in the near term. Furthermore, the Province remains committed to bringing per capita spending in line with other large provinces, an effort that has been supported by restraint on public sector compensation, despite facing increasing inflationary pressures. As a result, DBRS Morningstar now expects the adjusted debt-to-GDP ratio to remain below 20%, which is below pre-Coronavirus Disease (COVID-19) levels.

For 2022–23, the Province forecast a surplus of $511 million, although the first-quarter update revealed a dramatically improved outlook. Strong energy prices now have the Province projecting a $13.2 billion surplus. DBRS Morningstar makes adjustments to reported results to recognize capital spending as incurred rather than as amortized and exclude nonrecurring items to arrive at an adjusted deficit. On a DBRS Morningstar-adjusted basis, this equates to a $10.5 billion surplus, or 2.3% of GDP—the best outlook among all provinces.

The Province has not updated its multiyear forecast, but the original 2022 budget pointed to ongoing modest surpluses through 2024–25. This would equate to a roughly balanced position on a DBRS Morningstar-adjusted basis. While energy price volatility remains a key fiscal risk for the Province, there is ample flexibility within existing price assumptions (West Texas Intermediate: USD 65/barrel to USD 70/barrel) to sustain a moderation in oil prices without swinging back into sizable deficits.

Based on the Q1 2022–23 update, the DBRS Morningstar-adjusted debt ratio is likely to fall to 18.6% of GDP, which, if achieved, would mark the lowest debt burden for Alberta since 2017–18. If Alberta maintains its fiscal balance, DBRS Morningstar expects the debt-to-GDP ratio to hover around 20% or below. Should energy prices remain strong, combined with fiscal restraint, further material reductions in the debt-to-GDP ratio are possible.

For 2022, Alberta estimates real GDP to grow by 4.9% before moderating to a 3.2% rise in 2023. Despite strong momentum in early 2022, downside risks are mounting as persistently high inflation and rising interest rates increase the chances of a material slowdown in global economic growth. This, in turn, would likely lead to a material decline in energy prices, with ripples throughout the provincial economy given its high reliance on the energy sector.

The outlook is further clouded by near-term political uncertainty. Following Premier Jason Kenney's announcement to resign as head of the United Conservative Party in May 2022, the party is currently in the midst of a leadership race with results forthcoming on October 6, 2022. Furthermore, a general election is required to take place by May 31, 2023, thereby contributing to ongoing political uncertainty through next spring.

RATING DRIVERS
DBRS Morningstar will look to resolve the Positive trends within the next 12 to 18 months, likely following the next general provincial election, with increased clarity regarding the government's fiscal and economic policy. The ratings could be upgraded by one notch, provided the adjusted debt-to-GDP ratio remains close to, or below, 20.0% and the adjusted surplus/deficit is near balanced, or better, on a sustained basis. DBRS Morningstar could restore the Stable trends if there is a material decline in energy prices, leading to weaker-than-expected financial risk metrics and/or evolving political priorities that lead to increased fiscal and economic policy uncertainty.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS

Environmental (E) Factors
DBRS Morningstar considers emissions, effluents, and waste to have a relevant effect on the credit analysis and applied a negative overlay to reflect Alberta’s high greenhouse gas (GHG) emissions. Alberta is the largest emitter of GHGs among all provinces, including on a per capita basis. In 2020, GHG emissions were 256.5 megatonnes of carbon dioxide—a 55% increase from 1990, according to Environment and Climate Change Canada. Alberta regulates industry emissions and, since 2020, imposes an industrial carbon tax on heavy emitters, which, according to the Province, has resulted in a decline in the intensity of emissions in the oil and gas sector.

There were no 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 (May 17, 2022).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The 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.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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].

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