DBRS Limited (DBRS) confirmed the Issuer Rating and Long-Term Debt rating of the Province of Nova Scotia (Nova Scotia or the Province) at A (high) and confirmed the Province’s Short-Term Debt rating at R-1 (middle). DBRS also confirmed the Guaranteed Long-Term and Short-Term Debt ratings of the Nova Scotia Municipal Finance Corporation at A (high) and R-1 (middle), respectively, and the Government Guaranteed Debt of the Nova Scotia Power Finance Corporation at A (high). All trends are Stable. Positive operating results and limited new debt needs are contributing to the gradual but steady declines in the debt ratio. Notwithstanding these near-term improvements, the effects of an ageing population and the weak outlook for potential economic growth may limit upward movement in ratings.
For the fiscal year ending March 31, 2019, Nova Scotia reported a surplus of $120.0 million. This marked the Province’s third consecutive surplus and surpassed budget expectations. On a DBRS-adjusted basis, after incorporating capex as incurred rather than as amortized, this translates to a deficit of $23.9 million, or 0.1% of gross domestic product (GDP). Nominal GDP growth more than offset higher debt, resulting in the debt-to-GDP ratio declining to 35.0% from 35.5% a year earlier.
Nova Scotia’s 2019–20 budget follows the plan established when the Liberal government was re-elected in 2017. The budget highlights three themes: (1) maintaining fiscal balance, (2) spending on priority areas and (3) fostering economic growth. Nova Scotia projects a budget surplus of $34 million in 2019–20, equating to a shortfall of $207 million, or 0.5% of GDP, on a DBRS-adjusted basis. Over the medium term, revenue growth is expected to average 2.4%, slightly exceeding average annual expense growth and contributing to gradually growing surpluses, budgeted to reach $73.4 million by 2022–23. This suggests small DBRS-adjusted deficits of less than 1.0% of GDP throughout the plan and resulting in the debt-to-GDP ratio falling to about 32% by 2022–23.
Nova Scotia’s budget assumes real GDP growth of 0.8% in 2019 and 0.9% in 2020, which appears to be somewhat conservative compared with the current private-sector consensus tracked by DBRS. Like most provinces, growth is now moderating because of slowing growth in household consumption, weaker housing market activity and some moderation in export activity. Although subject to considerable uncertainty, real GDP growth is expected to strengthen in the early 2020s when the second phase of the federal shipbuilding contract (combat vessels) commences at the Halifax shipyard. Ongoing global trade uncertainty and slowing global growth represent key near-term economic risks for the Province. Demographic challenges present a longer-term structural challenge to Nova Scotia’s economy as slow population growth and an aging workforce will weigh on growth potential and contribute to fiscal pressures.
A positive rating action would be dependent on continued fiscal discipline and sustained economic improvement, leading to meaningful debt reduction. Alternatively, downward pressure on the rating could arise from a significant deterioration in fiscal performance or material increase in debt stemming from relaxed fiscal discipline or a serious economic shock.
All figures are in Canadian dollars unless otherwise noted.
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