DBRS Morningstar Confirms the Government of Nunavut’s Issuer Rating at AA (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Government of Nunavut’s (Nunavut or the Territory) Issuer Rating at AA (low) with a Stable trend. The credit rating is supported by the strong institutional framework that decouples the government’s finances from a weak underlying economy and results in stable government finances and a low debt burden. The Stable trend reflects DBRS Morningstar’s view that the Territory's fiscal performance is likely to remain manageable and the debt burden low.

For 2023–24, Nunavut's consolidated budget forecasts a surplus of $96.9 million. DBRS Morningstar makes adjustments to recognize capital spending as incurred rather than as amortized. This equates to a DBRS Morningstar-adjusted surplus of $38.3 million, or less than 1.0% of GDP.

On an unconsolidated basis (i.e., excluding Qulliq Energy Corporation and the revolving funds), the budget forecasts ongoing modest surpluses, though this is subject to further revision in future years. Additionally, the recently approved capital expenditure program points to increased spending, although DBRS Morningstar notes the Territory has a history of underspending. DBRS Morningstar expects Nunavut’s track record of strong fiscal performance, ample liquidity, and reliable federal funding will leave it well positioned to respond to challenges, including the high cost of program delivery and broader economic uncertainty.

Nunavut’s debt is low and quickly declining. At March 31, 2023, adjusted debt declined 4.5% from the prior year to $399.0 million. This equates to a debt-to-GDP ratio of 8.4%. In the absence of material new borrowing, DBRS Morningstar projects Nunavut’s debt-to-GDP ratio will decline to less than 5.0% through the medium term. The Territory's ample liquidity limits the need for any external borrowing. Given the strong institutional framework, low debt burden, and capacity to afford additional debt financing, there is ample room within the assigned credit rating to withstand an increase in debt.

For planning purposes, Nunavut uses the Conference Board of Canada’s economic forecast for 2023, which points to real GDP growth of 9.9% and nominal GDP growth of 13.6%. Economic activity will continue to be contingent upon commodity prices, completion of capital projects, and future developments in the resource sector along with fluctuations in government spending. The rising cost of living, volatility in commodity prices, and concerns about weakening global macroeconomic conditions could limit growth potential through 2024.

CREDIT RATING DRIVERS
Nunavut is well placed in the current credit rating category. Downward credit rating pressure could result from a weaker institutional framework, while a positive credit rating action would require further economic diversification, a broadening of the tax base, and sustained strong fiscal performance.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Social (S) Factors
DBRS Morningstar considers access to basic services to have a relevant effect on the credit analysis and applied a negative overlay. Social risks remain prevalent, as access to basic necessities (food, shelter, and water) and the inclusion, engagement, and representation of Inuit peoples in the broader economy are key concerns facing the Territory. Nunavut’s harsh geographical setting, the legacy of colonialism, and the impact of forced relocation of peoples and loss of culture and language are likely to shape the political and economic environment for the foreseeable future.

There were no Environmental or 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/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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