Press Release

Morningstar DBRS Confirms the Province of Prince Edward Island's Credit Ratings at "A" and R-1 (low), Maintains Stable Trends

Sub-Sovereign Governments
June 28, 2024

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the Long-Term Debt rating of the Province of Prince Edward Island (PEI or the Province) at "A" as well as the Short-Term Debt rating at R-1 (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings remain underpinned by the longer-term outlook for PEI's economy and the government's ongoing commitment to responsible fiscal policy. While the financial outlook has clearly deteriorated with a return to balance not anticipated over the medium term, Morningstar DBRS believes PEI should be able to withstand any temporary weakness in its financial risk assessment without an adverse change to the current credit ratings.

For 2024-25, the budget projected a deficit of $85.0 million, or 0.8% of GDP. On a Morningstar DBRS-adjusted basis, this equates to a shortfall of $322.7 million, or 3.0% of GDP. Over the medium term, adjusted deficits are projected to gradually shrink and remain under 1% of GDP. Morningstar DBRS notes that continued deficits and a sizable capital program will contribute to debt growth over the forecast horizon.

PEI's debt has increased steadily in recent years owing to operating deficits and sizable infrastructure needs. The budget projects a net debt-to-GDP ratio of 28.8% in 2024-25, increasing to 29.3% by 2026-27. Morningstar DBRS estimates the adjusted debt-to-GDP ratio will remain manageable for the current credit rating level at less than 40.0%, though any improvement in this ratio remains contingent upon sustained economic growth and deficit elimination over the next few years.

PEI's economic growth remains robust, with private sector consensus suggesting real GDP growth of 2.2% in 2024, and 2.1% in 2025 -- the strongest among Atlantic provinces and higher than the national average. The Province anticipates growth in population, housing starts, tourism activity, and retail trade should mitigate the impacts of inflation, still relatively high interest rates, and the uncertainty related to fuel prices and potential supply chain disruptions arising from escalating geopolitical tensions.

CREDIT RATING DRIVERS
The credit ratings remain comfortably placed in the "A" category. A positive credit rating action could result from some combination of change in one or more critical rating factors coupled with a sustained recovery in operating results and notable decline in the debt-to-GDP ratio. A negative credit rating action could result from substantial economic weakness resulting in materially weaker financial risk metrics.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

CRITICAL RATING FACTORS (CRFs) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of CRF Factors
In the analysis of PEI, the CRF factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of PEI, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the CRF and the FRA
In the analysis of PEI, the CRF carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Rating Canadian Provincial and Territorial Governments (15 April 2024)
https://dbrs.morningstar.com/research/431208

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024) - https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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