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

DBRS Limited (Morningstar DBRS) 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, Morningstar DBRS confirmed the Nova Scotia Power Finance Corporation's Series AM Government Guaranteed Debt at A (high). All trends are Stable.

Nova Scotia's fiscal outlook has deteriorated relative to expectations a year ago. The 2024 budget revealed an acceleration in program spending and significant tax relief measures, absent any plan for a return to balance. For 2024-25, a deficit of $467 million was forecast, although this has since been revised to a shortfall of $654 million in the Province's first-quarter update. Furthermore, the medium-term plan pointed to deficits of $608.6 million in 2025-26, before declining gradually in 2026-27 and 2027-28. On a Morningstar DBRS-adjusted basis, these equate to deficits of 2.1% to 2.6% of GDP.

The governing Progressive Conservative Party has now called an early election, scheduled for November 26, 2024, following a surprise announcement to reduce the harmonized sales tax by one percentage point to 14%, beginning April 1, 2025. This suggests further deterioration to the medium-term fiscal outlook, although it's possible the government may look to find offsets elsewhere. Currently, polling suggests the Progressive Conservative Party is likely to be reelected, although it remains very early in the election campaign. While Nova Scotia has ample flexibility within its current ratings, a prolonged period of moderate deficits and rising debt will reduce flexibility.

On a Morningstar DBRS-adjusted basis, debt-to-GDP will increase to 35.3% in 2024-25 and is expected to continue to trend upward to 40.2% of GDP by 2027-28; however, widening fiscal deficits driven by campaign promises and/or a more pronounced economic slowdown could put further upward pressure on debt metrics. Morningstar DBRS previously expected debt-to-GDP to reach 35% over the medium term.

Based on Nova Scotia's first-quarter update, the Province anticipates real GDP growth of 1.7% in 2024, followed by 1.8% in 2025. While easing monetary policy is likely to provide a boost to consumer spending, slowing population growth due to recent changes in federal immigration policy, geopolitical conflicts, and a potentially more restrictive global trade environment present key downside risks to the outlook.

CREDIT RATING DRIVERS
Although unlikely in the near term, a positive credit rating action could arise from a sustained improvement in fiscal performance and improving debt-to-GDP ratio. 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, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or 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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

CRITICAL RISK FACTORS (CRF) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of CRFs
In the analysis of the Province of Nova Scotia, the CRFs are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of the Province of Nova Scotia, 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 the Province of Nova Scotia, 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 (April 15, 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 following methodology has also been applied:

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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