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. Prudent fiscal management and a recovery in resource revenue have resulted in a swift return to balance and a quickly declining debt-to-GDP ratio. Because of the recent turnaround in its fiscal trajectory, DBRS Morningstar believes the Province is well positioned to withstand any commodity price volatility without materially eroding its credit profile.

For the year ended March 31, 2023, the Province reported a surplus of $1.6 billion, compared with a shortfall of $1.5 billion in the prior fiscal year. On a DBRS Morningstar-adjusted basis, this equates to a $1.2 billion surplus, or 1.2% of GDP.

The medium-term outlook has significantly improved from the time of the last review, with budget surplus projections stemming from stronger-than-anticipated tax and resource revenue and subsiding extraordinary pressures. The government projects a budget surplus of $1.0 billion (1.0% of GDP) in 2023–24, equating to a surplus of $340.3 million (0.3% of GDP) on a DBRS Morningstar-adjusted basis. Based on medium-term projections, DBRS Morningstar estimates modest shortfalls (less than 1.0% of GDP) between 2024–25 and 2026–27.

Saskatchewan's debt outlook has materially improved from prior year expectations. Despite significant capital needs, the repayment of operating debt and the forecast for consecutive surpluses and economic expansion support an improved debt-to-GDP ratio. The budget projects the net debt-to-GDP ratio to be roughly 13.6% by 2027–28, or 23.5% on a DBRS Morningstar-adjusted basis if economic growth endures.

In 2022, real GDP grew by 5.7% relative to the prior year—the largest among Canadian provinces. Saskatchewan forecasts economic growth to average around 2% through 2027–28. Ongoing strength in resource production and exports and business investment led by manufacturing and processing sectors should fuel the economic growth momentum. The high inflationary and interest rate environment, subdued consumer spending, lingering labour shortages, and muted global growth outlook remain key risks.

CREDIT RATING DRIVERS
The ratings are comfortably within their current rating categories. A positive rating action could result from a combination of positive changes in critical rating factors and further sustained improvement in key financial risk metrics. While unlikely, a negative rating action could result from persistent economic weakness, large and sustained operating deficits, and material deterioration in the debt-to-GDP ratio.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Based on the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings,” DBRS Morningstar views the carbon and greenhouse gas (GHG) costs factor as relevant to the credit ratings and modestly negative to the overall ratings. Saskatchewan is the fourth-largest GHG emitter (mainly from oil and gas, agriculture, and electricity) among Canadian provinces, and its GHG emissions are the second highest on a per-capita basis. In 2021, GHG emissions were roughly 67 megatonnes of carbon dioxide equivalent, according to Environment and Climate Change Canada (2023 National Inventory Report). Federal and provincial policies on the timeline to reach emissions-free electricity generation (particularly the transition away from coal-fired power plants) remain divergent and a cause for contention between the two governments.

The E factor has changed from the prior credit rating disclosure. We indicate carbon and GHG costs as relevant, as opposed to the earlier emissions, effluents, and waste factor, reflecting our refined interpretation to ensure consistent application across Canadian provinces and within DBRS Morningstar. The E factor is considered relevant and modestly negative to the overall ratings, which remains consistent with the prior rating disclosure.

There were no 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Rating Canadian Provincial and Territorial Governments (April 28, 2023) https://www.dbrsmorningstar.com/research/413265

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit 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 credit 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 credit ratings are under regular surveillance.

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

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