DBRS Limited (DBRS) confirmed the Issuer Rating of the Province of Newfoundland and Labrador (Newfoundland or the Province) at A (low). DBRS also confirmed the ratings of the Province’s Long-Term Debt and Short-Term Debt at A (low) and R-1 (low), respectively. Additionally, DBRS confirmed the Guaranteed Long-Term Debt rating of Newfoundland and Labrador Municipal Financing Corporation at A (low) and the Guaranteed Long-Term Debt and Guaranteed Short-Term Debt ratings of Newfoundland and Labrador Hydro at A (low) and R-1 (low), respectively. All trends remain Stable. Following the reelection of the Liberal government in May 2019, the government has maintained its plan to balance the provincial budget by 2022–23. While the fiscal and economic outlook remains challenging, the government’s efforts have significantly reduced annual budget deficits and slowed the pace of debt growth.
Newfoundland has forecast a surplus of $1.9 billion in 2019–20 as a result of a renewed Atlantic Accord. Excluding the Atlantic Accord, the budget shortfall would have been $577 million, down from a peak shortfall of $2.2 billion in 2015–16. Despite the significant progress in addressing the budget gap, the outlook remains challenging and requires further structural measures to recast the government’s expenditure profile and ease annual spending pressures.
The DBRS-adjusted deficit is projected to be 2.4% of gross domestic product (GDP) in 2019–20, falling to 0.5% of GDP by 2022–23. As a result, the debt-to-GDP ratio is now forecast to rise to about 56% by 2020–21 (the highest debt burden among provinces) before gradually declining thereafter. This is a lower peak than anticipated by DBRS last year and meaningfully below the projected peak of 65% when DBRS downgraded the Province’s ratings in 2016. DBRS notes this outlook remains subject to downside risks, including the outlook for commodity prices and the possibility that the full costs of the Muskrat Falls project are not recovered through the electricity rate base. Regardless, DBRS expects the debt outlook to remain within an acceptable range for the current ratings.
The Province projected real GDP growth of 4.1% for 2019, supported by increased oil and iron ore production as well as ongoing work on the West White Rose and Voisey’s Bay underground mine projects. The medium-term outlook continues to be challenging, as real GDP is expected to fluctuate between a contraction of 0.1% and growth of 2.4% over the subsequent three years. As large capital investment projects pass peak construction and enter the production phase, their contribution to growth is expected to diminish.
A positive rating action would require (1) a sustained improvement in fiscal performance, (2) a declining debt-to-GDP ratio and (3) clarity about how costs related to Muskrat Falls will be recovered and the extent to which provincial subsidies will be necessary for electricity-rate relief. DBRS has already incorporated potential downside risks associated with Muskrat Falls and electricity rates into the rating. Consequently, a negative rating action is highly unlikely and would likely stem from a significant and sustained deterioration in the provincial economy.
All figures are in Canadian dollars unless otherwise noted.
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