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, which 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 framework is unlikely to fundamentally change through the medium term and, as such, budgetary results should remain sound and the debt burden low. Progress toward devolution continues following the signing of an Agreement in Principle in August 2019, as Nunavut seeks increased control of Crown lands, water, and resources, but this is not expected to meaningfully alter the outlook for government finances over the near to medium term.
Nunavut does not produce a fully consolidated budget but has introduced summary statements for operations, cash flows, and net financial assets to allow for better comparisons with public accounts. For 2020–21, the budget projects an operating deficit of $30.4 million (including the net results of revolving funds). DBRS Morningstar makes adjustments to recognize capital spending as incurred rather than as amortized. This results in a deficit of $10.8 million, or 0.2% of GDP, for 2020–21. Nunavut also prepares a multiyear forecast (excluding Qulliq Energy Corporation and the revolving funds), which projects gradually increasing surpluses through 2022–23, after prudently incorporating $50.0 million in contingencies annually.
Economic growth is expected to remain strong, though volatile, through the medium term. For planning purposes, Nunavut uses the Conference Board of Canada’s economic forecast, which points to real GDP growth of 12.9% and nominal GDP rising by 15.7% in 2020 as a result of increased mining output.
DBRS Morningstar projects Nunavut’s total debt will be $469.5 million as of March 31, 2020, up 1.7% from the previous year. Under the Nunavut Act, the federal government has set the Territory’s maximum amount of borrowing at $650 million. Although Nunavut’s debt has risen, faster growth in nominal GDP has resulted in the decline of the debt burden as a share of GDP—estimated to be 11.9% in 2019–20, down from a peak of 15.1% in 2017–18. Given the ongoing amortization of existing debt and the government’s funding of capital with cash on hand, cash from operations, and federal government contributions, DBRS Morningstar projects that Nunavut’s debt-to-GDP ratio will trend downward toward 9.0% by 2021–22. This compares very favourably with Canadian provinces.
No rating action is likely in the near to medium term. Downward rating pressure could arise from a weakening of the institutional framework, while a positive rating action would require further economic diversification, a broadening of the tax base, and continued strong fiscal performance.
All figures are in Canadian dollars unless otherwise noted.
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