DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and the Long-Term Debt and Short-Term Debt ratings of the Province of Saskatchewan (Saskatchewan or the Province) to AA (low), AA (low), and R-1 (middle), respectively. DBRS Morningstar also downgraded the ratings of Saskatchewan Power Corporation’s Long-Term Obligations and Short-Term Obligations to AA (low) and R-1 (middle), respectively (for more information, see the Saskatchewan Power Corporation report published December 30, 2019). All trends are Stable. These rating actions resolve the previous Under Review with Negative Implications status.
Saskatchewan has now experienced two significant economic shocks in the past decade. The downgrades reflect the expected cumulative deterioration to the Province's credit profile resulting from (1) the impact of the 2014–16 commodity price correction, and (2) the twin shocks of the Coronavirus Disease (COVID-19) pandemic and the collapse in oil prices in 2020. While DBRS Morningstar has confidence in the government’s commitment to balanced budgets and lower debt, the extent of the deterioration in the Province’s finances will take some time to correct and several downside risks to the outlook remain evident.
As with other provinces, Saskatchewan's economy has been significantly affected by the temporary economic shutdowns. Employment fell by nearly 10% between February and May, while the unemployment rate doubled to 12.5% during the period. Federal and provincial programs have provided some support to households and businesses, but the provincial economy is nevertheless set to contract sharply. The Province projects real GDP will fall by 6.3% (12.8% nominal) in 2020, which is similar to private sector forecasts.
While the impact of the coronavirus pandemic will be largely temporary, oil prices may have a more enduring impact on the Province's economy and finances. Saskatchewan's economic recovery after the 2014–16 oil price correction was uneven, punctuated by several unexpected challenges in the mining and oil and gas industries. The outlook is similarly challenging today. The Province is forecasting a sharp contraction in oil and gas investment, which will weigh on economic growth and limit future growth in production. Similarly, the mining industry will benefit from steady growth in demand for potash and other commodities, but significant new investment or a reopening of shuttered mines appears unlikely in the near term. Taken together, these factors are likely to limit growth potential in the near term.
Saskatchewan has projected a budget deficit of $2.4 billion for 2020–21, which equates to a DBRS Morningstar-adjusted deficit of $2.8 billion (3.9% of GDP). The deterioration stems from a sharp fall in revenue, particularly resource revenue, and a steep increase in spending related to the coronavirus pandemic. The Province expects to collect only $1.0 billion in resource revenue in 2020–21, its lowest level in 20 years. Spending is set to increase sharply, which reflects both growth in underlying base budgets as well as $700 million in coronavirus pandemic-related spending. Saskatchewan has had relatively few cases of coronavirus; as such, much of the pandemic-related spending is for temporary support and stimulus programs.
The Province did not provide a multiyear fiscal outlook, though the government did commit to develop a plan to balance the budget "over time." There is considerable uncertainty in the outlook; however, the extent of the budget shortfall combined with a relatively weak near-term economic outlook suggests the budget deficit will likely remain elevated over the next two to three years. While Saskatchewan's government has demonstrated a strong commitment to balanced budgets and low debt in the past, DBRS Morningstar expects the government to take a pragmatic and gradual approach to fiscal consolidation so as not to harm the economic recovery, similar to that taken following the 2014–16 commodity price correction.
Saskatchewan's DBRS Morningstar-adjusted debt (tax-supported debt and unfunded pension liabilities) is projected to rise by $1.8 billion to $22.8 billion in 2020–21. The adjusted debt-to-GDP ratio will rise to 31.3% in 2020–21, up from 25.1% in 2019–20. DBRS Morningstar estimates that the debt-to-GDP ratio will remain in the 30% to 35% range in the subsequent year. At this level, the debt-to-GDP ratio will remain relatively low compared to other Canadian provinces, but well above prerecession levels (14.4% in 2014–15).
A subsequent negative rating action is unlikely, but could result from some combination of persistent economic weakness, large operating deficits, and further deterioration in the debt-to-GDP ratio. A positive rating action would require a rebound in economic activity paired with a sustained recovery in operating results and the debt-to-GDP ratio.
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 is Rating Canadian Provincial and Territorial Governments (May 13, 2020) and Global Methodology for Government Related Entities (March 10, 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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