DBRS Morningstar Confirms Province of Manitoba at A (high) and R-1 (middle), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Manitoba (Manitoba or the Province) at A (high) and the Short-Term Debt rating at R-1 (middle). All trends are Stable. DBRS Morningstar also confirmed the Long-Term and Short-Term Obligations ratings of The Manitoba Hydro-Electric Board at A (high) and R-1 (middle), respectively, both with Stable trends.

The Province released an economic and fiscal update on March 19, 2020, which was about a week later than planned due to delaying tactics in the legislature by the opposition. During that week, global economic conditions deteriorated considerably, diminishing the relevance of the Budget's underlying economic and fiscal projections. The Province tabled a supplementary document outlining possible impacts of the Coronavirus Disease (COVID-19) on the provincial economy and the government's fiscal plan. Since that time the outlook has deteriorated further. The Province has not provided a revised budget forecast, but has signalled that the budget deficit could be as large as $5.0 billion in 2020-21.

While the outlook remains uncertain, Manitoba's credit profile remains consistent with the A (high) rating under DBRS Morningstar's assumptions. However, the deterioration in the Province's credit metrics does increase the risk of a negative rating action in the future, particularly if the Province is unable to quickly reduce the budget deficit and slow debt growth.

In the absence of an updated provincial forecast, DBRS Morningstar assumed a meaningful contraction in economic activity (6.0% real, 4.5% nominal), consistent with recent private-sector forecasts, reflecting a shutdown of nonessential services followed by an extended period of normalization characterized by a slow return to work and ongoing physical distancing requirements. Manitoba's shutdown was less severe than other provinces and it began its gradual phased reopening on May 4, 2020, when it allowed restaurant patios, dentist offices, and most retailers to re-open. On May 27, the Province announced Phase 2 of its reopening plan which, effective June 1, will allow additional businesses to re-open, allow greater access to educational and child care facilities, and the resumption of sports, arts, recreational, and cultural activities while ensuring physical distancing.

With a material decline in revenue, coronavirus-related health expenditures, and new measures to support individuals and businesses, DBRS Morningstar estimates the Province's deficit to be about $2.5 billion. DBRS Morningstar makes adjustments to recognize capital spending as incurred rather than as amortized to arrive at the adjusted deficit. The DBRS Morningstar-adjusted deficit is estimated to be $3.0 billion, or 4.3% of GDP.

With the deterioration in the operating outlook and additional cash requirements to fund deferral programs, increased capital spending, and more liquidity, DBRS Morningstar estimates that the Province's borrowing program could increase by upward of $2.8 billion.

Under these assumptions, DBRS Morningstar estimates that net debt could surpass $30 billion and that the Province's DBRS Morningstar-adjusted debt will approach $37 billion. This equates to a debt-to-GDP ratio of 52%, an increase of 10 percentage points from 2019–20.

The outlook for 2021–22 and subsequent years remains uncertain. DBRS Morningstar believes the government remains committed to balancing the budget but expects the Province will extend its timeline for doing so. DBRS Morningstar's projections suggest that the deficit will remain elevated through the medium term. Similarly, while the debt-to-GDP ratio will begin to fall in 2021–22 with the economic recovery, it will remain elevated through the medium term.

RATING DRIVERS
A negative rating action could result from the government's failure to reduce budget deficits and stabilize the debt-to-GDP ratio over the medium term. A positive rating action is not contemplated in the current environment.

NEXT REVIEW
DBRS Morningstar expects to conduct a subsequent review of the Province's credit profile once the outlook has stabilized and Manitoba has provided an updated fiscal and economic outlook. At that time, DBRS Morningstar expects to release its customary rating report.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Canadian Provincial and Territorial Governments (May 13, 2020) and Global Methodology for Government Related Entities (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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