DBRS Confirms the Province of Alberta at AA (high) and R-1 (high), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of the Province of Alberta (the Province) at AA (high), along with its Long-Term Debt and Short-Term Debt ratings at AA (high) and R-1 (high), respectively. Concurrently, the Long-Term Obligations rating of the Alberta Capital Finance Authority has been confirmed at AA (high). The trends remain Stable based on the moderate financial flexibility the Province has at its current rating category to withstand further economic and fiscal deterioration amid the current oil price environment. Furthermore, Alberta’s debt burden is expected to remain relatively low in relation to its provincial peers. However, DBRS continues to monitor the Province’s deteriorating fiscal position and believes that further revenue and expenditure measures may be required to slow the deterioration in financial metrics should the recovery in oil prices prove to be slower than currently anticipated.

For 2015-16, Alberta recorded a deficit of $6.4 billion. On a DBRS-adjusted basis, this equates to a shortfall of $9.3 billion, or 2.8% of gross domestic product (GDP). DBRS notes that this marks a modest improvement relative to expectations at the time of the October 2015 budget, largely on account of lower-than-planned capital investment. Nevertheless, this has led to a notable increase in debt, pushing the debt-to-GDP ratio up to 10.1% from 7.1% in 2014-15.

Alberta’s 2016-17 budget projected a significant fiscal shortfall estimated at $10.4 billion for the current year. However, this has subsequently widened to $10.9 billion based on first quarter projections because of the significant wildfires experienced in May 2016. After excluding the non-recurring impact of the wildfires, the DBRS-adjusted shortfall remains unchanged from budget at $13.9 billion, or 4.4% of GDP. DBRS notes that there is no return to balance forecast over the fiscal planning horizon through 2018-19, which raises concerns about the government’s willingness to address its structural deficit. The assumption of a rebound in resource royalties and other taxes presents meaningful downside risk to the revenue forecast. Furthermore, expenditure restraint targets, particularly regarding public sector compensation, remain unproven and a further area of downside risk. As such, the budget points to steady increases in DBRS-adjusted debt, potentially pushing Alberta’s debt burden above 19% of GDP by 2018-19.

For 2016, real GDP was budgeted to decline by 1.4%, but following the severe wildfires experienced in May and lost production, it now appears that the contraction will be even greater. The current private sector consensus tracked by DBRS points to a decline in real GDP of 2.3%, while Alberta’s recently released first quarter update points to an even larger contraction of 2.7%. For 2017, rebuilding efforts in Fort McMurray are expected to provide modest uplift, with the current private sector consensus pointing to real growth of 2.3%.

RATING DRIVERS
A positive rating action is highly unlikely in the current fiscal and economic environment. Alternatively, downward pressure on the ratings could arise from underperformance of fiscal targets, potentially resulting from a slower-than-budgeted recovery in oil prices or faster-than-planned spending growth, leading to a material increase in debt beyond that currently anticipated by DBRS.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Canadian Provincial Governments and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.