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

DBRS Limited (DBRS Morningstar) confirmed the Government of Nunavut’s (Nunavut or the Territory) Issuer Rating at AA (low) with a Stable trend. The 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 DBRS Morningstar’s view that the Territory's fiscal performance is expected to remain manageable and the debt burden low.

Real GDP growth slowed to 2.6% in 2020 as a result of severe travel restrictions and disruptions to the mining sector because of the Coronavirus Disease (COVID-19) pandemic but is expected to accelerate to 11.2% in 2021, based on the latest Conference Board of Canada forecast. Over the medium to longer term, declining exploration and investment activity in the resource sector points to more tepid growth.

Nunavut's consolidated budget was presented in early March 2021, which pointed to a consolidated surplus of $19.6 million. DBRS Morningstar makes adjustments to recognize capital spending as incurred rather than as amortized. Based on the consolidated budget, a DBRS Morningstar-adjusted surplus of $13.4 million, or 0.3% of GDP, was anticipated, although early indications suggests that fiscal performance has been better than expected.

Following the October 25, 2021, election, P.J. Akeeagok was selected as Premier, and the incoming cabinet members have been assigned portfolios. In addition, Members of the Legislative Assembly will gather in early December to establish priorities for the upcoming mandate that will replace the previous mandate (known as Turaaqtavut). While the change in government presents some near-term uncertainty, DBRS Morningstar does not expect it to have a material impact on the fiscal direction and debt outlook for the Territory. Furthermore, government priorities are likely to remain focused on addressing longstanding challenges, including a critical housing shortage, infrastructure needs, access to community-based healthcare, and the environmental impacts of climate change.

Nunavut's debt is low compared with the Canadian provinces and declining. DBRS Morningstar projects Nunavut’s total debt will be $425.6 million as of March 31, 2022, down 5.6% from the previous year. No new debt needs for core government or Qulliq Energy Corporation are expected in the near to medium term; in fact, the ongoing amortization of existing debt should see total debt decline. As such, DBRS Morningstar projects that Nunavut’s debt-to-GDP ratio will trend downward in the coming years and approach 7.0% by 2025–26. This leaves ample room within the assigned rating to withstand an increase in debt.

RATING DRIVERS
No rating action is likely in the near to medium term. Downward rating pressure could result from a weakening of the institutional framework, while a positive rating action would require further economic diversification, a broadening of the tax base, and sustained strong fiscal performance.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Canadian Provincial and Territorial Governments (May 3, 2021; https://www.dbrsmorningstar.com/research/377881), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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