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

DBRS Limited (Morningstar DBRS) 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 Morningstar DBRS' view that the Territory's fiscal performance is likely to remain manageable.

KEY CREDIT RATING CONSIDERATIONS
For 2024-25, Nunavut's consolidated budget forecasts a surplus of $43.4 million (lower than a $96.9 million surplus in 2023-24). Nunavut's 2023-24 Public Accounts are yet to be publicly released. For the purposes of this release, Morningstar DBRS has used 2023-24 estimates based on the 2024-25 Consolidated Budget. Adjusted to recognize capital spending as incurred rather than as amortized, this equates to a Morningstar DBRS-adjusted deficit of $17.2 million, or 0.3% of GDP.

On an unconsolidated basis (i.e., excluding Qulliq Energy Corporation and the revolving funds), the budget projects deficits through the near term and notes that notable cost uncertainty is prompting the need for higher budget contingencies. Morningstar DBRS believes further pressure on adjusted financial results could arise as Nunavut accelerates capital spending to address sizable infrastructure needs. Nevertheless, Morningstar DBRS 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, 2024, adjusted debt declined 8.2% from the prior year to $382.9 million. This equates to a debt-to-GDP ratio of 7.9%, projected to decline to less than 5.0% by 2026-27. 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 sufficient 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 2024, which points to real GDP growth of 7.6%. Economic activity remains contingent upon commodity prices, completion of capital projects, future developments in the resource sector, and government spending.

CREDIT RATING DRIVERS
A positive credit rating action would require further economic diversification, a broadening of the tax base, and sustained strong fiscal performance. Downward credit rating pressure could result from a weaker institutional framework.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Social (S) Factors
The following Social factor had a relevant effect on the credit analysis: Access to Basic Services. Morningstar DBRS applies a negative overlay reflecting the view that 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 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) at https://dbrs.morningstar.com/research/437781.

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

(A) Weighting of CRFs
In the analysis of Nunavut, the CRFs were considered in the order of importance contemplated in the methodology.

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

(C) Weighting of the CRFs and the FRA
In the analysis of Nunavut, the CRFs carry 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 Environmental, Social, and Governance 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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