DBRS Morningstar Confirms Credit Ratings on Province of Nova Scotia at A (high) and R-1 (middle), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Nova Scotia (Nova Scotia or the Province) at A (high) and confirmed the Province’s Short-Term Debt rating at R-1 (middle). Concurrently, DBRS Morningstar confirmed the Nova Scotia Power Finance Corporation's Series AM Government Guaranteed Debt at A (high). All trends are Stable.

Nova Scotia has been a perennially strong fiscal performer but is expected to experience a modest deterioration in fiscal performance as increased spending is accompanied by continued deficits and rising debt amid a macroeconomic slowdown. However, DBRS Morningstar notes that Nova Scotia entered this period with considerable fiscal flexibility, a relatively strong balance sheet, and a resilient economy, which will help the Province withstand pressures arising from a deteriorating macroeconomic outlook.

The Province’s budget for 2023 (Budget 2023) forecast a deficit of $279 million in 2023–24, although this has since been revised to a shortfall of $403 million in the Province's first-quarter update. DBRS Morningstar makes adjustments to reported results to recognize capital spending as incurred rather than as amortized and excludes nonrecurring items to arrive at an adjusted deficit. On a DBRS Morningstar-adjusted basis, the first-quarter update equates to a shortfall of $1.5 billion, or 2.6% of GDP. The medium-term outlook points to increasing deficits reaching $611 million in 2025–26, before shrinking slightly in 2026–27. On a DBRS Morningstar-adjusted basis, these equate to deficits of 2.3% to 1.6% of GDP.

Contrary to prior expectations at the time of our last review in November 2022, Nova Scotia's debt burden is expected to rise modestly as spending ramps up for budget-related investments. On a DBRS Morningstar-adjusted basis, debt-to-GDP will increase to 32.1% in 2023–24 and is expected to continue to trend upward to 34.3% of GDP by 2026–27.

Based on Nova Scotia's first-quarter update, the Province anticipates real GDP growth of 0.8% in 2023, followed by 1.1% in 2024. DBRS Morningstar notes this forecast was developed in May 2023, with the current private-sector consensus pointing to real growth of 1.4% in 2023 and 0.8% in 2024 as the global macroeconomic conditions become less supportive.

CREDIT RATING DRIVERS
A positive credit rating action could arise from a sustained improvement in fiscal performance, improving debt-to-GDP ratio, and an understanding that financial risk metrics will not materially worsen in an environment of softening economic growth conditions. While firmly placed in the current category, downward pressure on the credit rating could arise from a sustained deterioration in fiscal performance and material increase in debt, in conjunction with deterioration in critical risk factors.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/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/rating-canadian-provincial-and-territorial-governments

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023), https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support

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 not 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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