DBRS Limited (DBRS Morningstar) confirmed the Province of Newfoundland and Labrador’s (Newfoundland or the Province) Issuer Rating and Long-Term Debt rating at A (low), with Negative trends. Newfoundland’s Short-Term Debt rating has been confirmed at R-1 (low) with a Stable trend. Concurrently, Newfoundland and Labrador Hydro’s Guaranteed Long-Term Debt rating has been confirmed at A (low), with a Negative trend. Newfoundland and Labrador Hydro’s Guaranteed Short-Term Debt rating has been confirmed at R-1 (low) with a Stable trend. The rating actions resolve the previous Under Review with Negative Implications status on Newfoundland’s Issuer Rating and Long-Term Debt rating and Newfoundland and Labrador Hydro’s Guaranteed Long-Term Debt rating.
On March 19, 2020, DBRS Morningstar placed Newfoundland’s Issuer Rating and Long-Term Debt rating Under Review with Negative Implications, while the short-term ratings were confirmed. The rating actions stemmed from the deteriorating global economic conditions and a sharp decline in global oil prices caused by the effects of Coronavirus Disease (COVID-19). This has had a profound impact on Newfoundland’s economy and public finances.
While Newfoundland’s credit profile is weakening, it remains within the A (low) rating category. As such, the rating confirmations reflect that the Province has flexibility to withstand the deterioration in fiscal and economic conditions anticipated by DBRS Morningstar in the near term. However, in the absence of a comprehensive fiscal and economic update, ongoing political uncertainty, and uncertainty regarding the timing and magnitude of any offsetting federal government support, further deterioration in credit quality is very possible and warrants a Negative trend on the long-term ratings.
On June 4, 2020, Newfoundland released an update regarding its 2019–20 fiscal results. The Province now estimates a surplus of $1.3 billion in 2019–20, down from the $1.9 billion surplus originally budgeted. Excluding one-time revenue related to the Atlantic Accord ($2.4 billion) review and recognizing capital spending as incurred, rather than as amortized, this equates to an adjusted deficit of $1.3 billion, or 3.6% of GDP. The deterioration is largely attributable to a combination of lower resource royalties, provincial taxes, and other own-source revenues, while spending was relatively unchanged from budget.
Newfoundland has yet to introduce its 2020 budget or provide any guidance on the medium-term fiscal and economic outlook. The onset of the coronavirus pandemic combined with a precipitous drop in oil prices caused Newfoundland to shelve budget development plans in favour of an interim supply bill. The interim supply bill provides the Province with necessary spending and borrowing authority through the end of September 2020, by which point a 2020 budget is anticipated, if not sooner.
As with other provinces, Newfoundland’s economy has been significantly affected by the temporary economic shutdowns. Employment fell by more than 11% between February and May, while the unemployment rate rose to 16.3% during the period. Federal and provincial support programs have provided some support to households and businesses, but the provincial economy is nevertheless set to contract sharply. DBRS Morningstar has assumed a meaningful contraction in economic activity (9.0% real, 15.0% nominal) in 2020, consistent with recent private-sector forecasts. Despite coronavirus cases being well contained in recent weeks, Newfoundland has been slower to reopen than most other provinces.
DBRS Morningstar has estimated possible fiscal impacts using Newfoundland’s 2019–20 fiscal update, Budget 2019 sensitivities, and insights from previous oil-price corrections. Based on a material decline in oil royalties, tax revenues, and government business enterprise net income, along with increased spending, DBRS Morningstar estimates that the 2020–21 deficit (on an adjusted basis) may approach $2.3 billion, 7.5% of GDP.
With the deterioration in fiscal outlook, and contraction in nominal GDP, DBRS Morningstar estimates that the adjusted debt-to-GDP ratio may rise above 75% in 2020–21. The trajectory for debt-to-GDP over the medium term is highly uncertain and will be dependent on the pace and magnitude of the economic recovery and the Province’s ability to gradually reduce the deficit.
In addition, the political calendar adds another element of uncertainty to the medium-term outlook. In February 2020, Premier Dwight Ball announced plans to resign. A leadership contest is underway with a new leader to be chosen by August 3, 2020. Following the selection of a new leader, and Premier, a provincial election is required within 12 months.
Newfoundland maintains sufficient liquidity in the form of cash balances and additional cash and credit facilities within broader public-sector entities to withstand near-term market volatility. Newfoundland has upcoming debt maturities of USD 150 million on December 1, 2020, and $500 million March 24, 2021. The Province continues to fund in both short- and long-term markets.
DBRS Morningstar could restore the Stable trends on the long-term ratings with increased clarity that adjusted deficits will begin to trend below 5.0% of GDP and debt stabilizes below 80% of GDP, or increased clarity around how costs related to Muskrat Falls will be recovered and the extent to which provincial subsidies will be necessary for electricity-rate relief. Conversely, a sustained deterioration in the provincial economy leading to a continuation of DBRS Morningstar-adjusted deficits above 5.0% of GDP and a debt-to-GDP ratio above 80% could lead to a one notch downgrade of the long-term ratings.
DBRS Morningstar expects to conduct a subsequent review of the Province's credit profile once Newfoundland has provided a comprehensive fiscal and economic outlook. At that time, DBRS Morningstar expects to release its customary rating report.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Canadian Provincial and Territorial Governments (May 13, 2020) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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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.
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