DBRS Morningstar Confirms British Columbia at AA (high) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of British Columbia (B.C. or the Province) at AA (high) and its Short-Term Debt rating at R-1 (high). DBRS Morningstar also confirmed British Columbia Hydro and Power Authority’s Long-Term Obligations rating at AA (high) and Short-Term Obligations rating at R-1 (high). All trends are Stable.

The rating confirmations reflect the underlying strength and diversity of the Province's economy and its disciplined management practices and a strong balance sheet. The Province's prudent track record of fiscal outperformance, strong balance sheet, and currently low debt burden lend stability to its credit profile and will likely withstand any pressures arising from the mounting economic headwinds. Following the appointment of a new Premier and leader of the British Columbia New Democratic Party, David Eby, in November 2022, the 2023 budget plans for increased spending in priority areas. This will result in a modest deficit but maintain a reasonable degree of fiscal prudence given the slowing economy. If fiscal discipline deteriorates and leads to significantly higher deficits over the medium term, this could reduce fiscal flexibility over the years to come.

The Province's 2023 budget forecasts a deficit of $4.2 billion in 2023–24, compared with a $3.6 billion surplus now estimated for 2022–23. On a DBRS Morningstar-adjusted basis, this equates to a shortfall of $10.6 billion, or 2.6% of GDP. Over the medium term, B.C. projects deficits of $3.8 billion and $3.0 billion for 2024–25 and 2025–26, which equate to deficits of 2.6% to 2.4% of GDP, respectively. Once again, the budget does not present any plan for a return to balance; however, the Province's fiscal guardrails continue to advocate for declining deficits year over year. DBRS Morningstar notes that B.C. has historically incorporated a significant level of prudence in its budget assumptions, which leaves room for outperformance, as has been the Province's trademark.

In 2022–23, the DBRS Morningstar-adjusted debt is estimated to have grown by a nominal $142 million to $62.5 billion. When combined with expansion in nominal GDP, this led to improvement in the debt-to-GDP ratio to 16.1% from 17.8% the year prior. Given B.C.’s consistent track record of outperformance when reporting year-end results, DBRS Morningstar believes there is reasonable likelihood that year-ending debt balances will be even lower when the Public Accounts are tabled later this year. Any improvement would carry-forward into subsequent years.

Based on budget estimates, DBRS Morningstar-adjusted debt is projected to reach 18.2% of GDP in 2023–24 and to approach roughly 21.4% of GDP by 2025–26. This is within DBRS Morningstar’s previous estimates and ensures B.C. continues to have one of the lowest debt burdens among the provinces.

For 2023, the Province anticipates real GDP growth of 0.4%, followed by 1.5% in 2024 and 2.4% in 2025. Like past budgets, the forecast remains conservative relative to the private-sector consensus. In line with the global economic outlook, growth is expected to slow in response to central bank efforts to raise policy rates and to curb inflation and economic slowdowns among key trading partners. Nevertheless, growth is forecast to resume an upward trend over the medium term.

RATING DRIVERS
A positive rating action would require the Province to maintain a sustainable budget position and for its DBRS Morningstar-adjusted debt-to-GDP ratio to fall well below 15.0% on a sustainable basis. A negative rating action could result from a sustained deterioration in operating results and marked increase in the debt-to-GDP ratio beyond the current expectations.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929 .

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

DBRS Morningstar applied the following principal methodologies:
Rating Canadian Provincial and Territorial Governments (April 28, 2023; https://www.dbrsmorningstar.com/research/413312) and Global Methodology for Rating Government Related Entities (February 28, 2023; https://www.dbrsmorningstar.com/research/410361).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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].

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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