Morningstar DBRS Confirms the Province of British Columbia at AA (high) and R-1 (high), Trends Changed to Negative

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Long-Term Debt rating of the Province of British Columbia (BC or the Province) at AA (high) and its Short-Term Debt rating at R-1 (high). Concurrently, the trends on the Issuer Rating and Long-Term Debt rating were changed to Negative from Stable.

KEY CREDIT RATING CONSIDERATIONS
The Negative trends reflect Morningstar DBRS' view that BC's approach to fiscal management has been gradually deteriorating in recent years, as the government tolerates ever-increasing budget deficits and rising debt. As such, key financial metrics continue to deteriorate or weaken relative to Morningstar DBRS' previous expectations, which is exhausting flexibility within the current credit ratings. The budget anticipates ongoing deficits and a significantly larger borrowing program, while prioritizing targeted public investments. Although the Province has incorporated prudence in Budget 2025 through reasonable economic assumptions and large contingencies, the Province has yet to present a plan to turn around its fiscal and debt outlook. Nevertheless, BC's strong balance sheet, past track record of outperformance, and diverse economy continue to lend support to its credit profile.

CREDIT RATING DRIVERS
A negative credit rating action could result from the inability of the Province to materially outperform current expectations on the fiscal and debt outlook. A positive rating action is unlikely in the near term; however, the trend could revert to Stable should meaningful budgetary action or improvement in the broader economic environment point to an improvement in the financial risk assessment factors.

CREDIT RATING RATIONALE
Budget 2025 forecasts a deficit of $10.9 billion in 2025-26 compared with the $9.1 billion deficit now anticipated in 2024-25. On a Morningstar DBRS-adjusted basis, this equates to a shortfall of $21.1 billion, or 4.7% of GDP, standing at one of the largest provincial deficits. Over the medium term, the Province projects deficits of $10.2 billion and $9.8 billion for 2026-27 and 2027-28, respectively. On a Morningstar DBRS-adjusted basis, these equate to deficits of 4.4% and 3.9% of GDP, respectively. Budget 2025 emphasizes that achieving a balanced budget will be a multi-year effort, continuing the path of modest year-over-year (YOY) declining deficits.

The latest budget points to a deterioration in debt-to-GDP ratio beyond Morningstar DBRS' previous expectations. Morningstar DBRS, at its last review, had contemplated a debt-to-GDP ratio approaching 27.0%. As per the latest budget estimates, on a Morningstar DBRS-adjusted basis, debt-to-GDP will increase to 25.2% in 2025-26 and is expected to continue to trend upward to 32.6% of GDP by 2027-28. The Province has signalled that the next budget iteration will present a credible strategy to curb the rising debt, with efforts already underway to identify potential savings and revenue opportunities to support a path toward fiscal balance.

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 RATING FACTORS (CRFs) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of CRFs
In the analysis of BC, the CRFs were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of BC, 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 BC, the CRFs carry greater weight than the FRA.

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

The principal methodologies are the Rating Canadian Provincial and Territorial Governments (April 25, 2025) https://dbrs.morningstar.com/research/452575. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

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@dbrsmorningstar.com.

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.

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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