DBRS Limited (DBRS) upgraded the Province of Prince Edward Island’s (PEI or the Province) Issuer Rating and Long-Term Debt rating to “A” from A (low) and changed the trends to Stable from Positive. DBRS also confirmed PEI’s Short-Term Debt rating at R-1 (low) with a Stable trend.
The upgrades recognize the sustained improvement in the Province’s credit profile over the past five years. The Province has pursued pro-growth policies aimed at increasing the population, which have materially lifted economic activity and improved the longer-term economic outlook. The previous Liberal government undertook a significant multi-year effort to balance the provincial budget, and as a result, the Province has presented either balanced or positive operating results in each of the past three years. Improved operating results and stronger economic growth have contributed to reduced borrowing requirements and a pronounced decline in the Province’s debt-to-gross domestic product (GDP) ratio.
The spring 2019 election resulted in a change in government with the Progressive Conservative party assuming power. The minority government will rely on support from opposition parties and has signalled that the general direction of fiscal and economic policy will remain fundamentally unchanged. The new government remains committed to pursuing pro-growth economic policies, maintaining balanced budgets and further reducing the debt-to-GDP ratio.
The Province has projected a surplus of $13.8 million for the 2018–19 fiscal year, which is better than the budget forecast of $1.5 million. The better result is largely attributable to better-than-expected revenue growth. On a DBRS-adjusted basis, after incorporating capex, the result equates to a deficit of $40.6 million, or 0.6% of GDP.
The Province’s 2019 budget was tabled shortly after the new government took office, and the policy direction remains largely consistent with that of the previous government. The Province presented a balanced budget, though spending continues to rise quickly as the Province seeks to manage the pressures associated with the growing population. Nevertheless, the Province continues to benefit from rising own-source revenue and significant increases in federal transfers (primarily infrastructure-related). With rising capital investment, the DBRS-adjusted deficit is projected to be $69.2 million, or 0.9% of GDP.
The economy has performed well in recent years, supported by strong population growth. The Province’s economy grew by an estimated 2.6% in 2018 and 3.5% in 2017. The private-sector consensus expects growth to moderate to 1.9% in 2019 and 1.5% in 2020. However, growth may well be stronger as the Province expects an annual population increase of about 1.5%.
DBRS has made several adjustments to its measure of DBRS-adjusted debt for PEI to improve comparability with other provinces and to ensure consistent application of its methodology. These changes resulted in the debt-to-GDP ratio series rising modestly, but the trend remains broadly unchanged. DBRS projects that the DBRS-adjusted debt-to-GDP ratio will fall to 38.3% by March 31, 2020, and steadily decline over the subsequent two years, potentially reaching 35.0% by 2021–22.
Another positive rating action is unlikely through the medium term as the critical and financial rating factors remain well anchored. A negative rating action is similarly unlikely but could occur if there were a sustained deterioration in operating results resulting in a significant increase in the provincial debt burden.
All figures are in Canadian dollars unless otherwise noted.
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