DBRS Limited (DBRS Morningstar) upgraded the Province of Newfoundland and Labrador’s (Newfoundland or the Province) Issuer Rating and Long-Term Debt rating to "A" from A (low) along with the Guaranteed Long-Term Debt of Newfoundland and Labrador Hydro, and the trend on all long-term ratings has been changed to Stable from Positive. Concurrently, DBRS Morningstar confirmed the Province’s Short-Term Debt rating and Newfoundland and Labrador Hydro’s Guaranteed Short-Term Debt both at R-1 (low) with Stable trends.
The ratings upgrade reflects Newfoundland's improving fiscal outlook, moderation in debt-to-GDP, and the removal of the negative ratings overlay related to the ongoing Muskrat Falls project. Although subject to considerable cost overruns and schedule delays, the Muskrat Falls project achieved commissioning in April 2023 and is now fully operational. While electricity rate mitigation plans will be subject to future general rate applications by Newfoundland and Labrador Hydro, DBRS Morningstar assumes that rate mitigation will ultimately be successful. As such, DBRS Morningstar believes the risks of stranded debt related to the project are considerably reduced and the negative overlay is no longer warranted.
Newfoundland forecasts a budget deficit of $160 million in 2023–24. On a DBRS Morningstar-adjusted basis, this equates to a shortfall of $527 million, or 1.3% of GDP, after making adjustments to recognize capital spending as incurred. Over the medium term, the Province anticipates returning to balance in 2024–25, which is two years earlier than planned, and maintaining small surpluses through 2027– 28. This equates to DBRS Morningstar-adjusted deficits of less than 1.0% through 2027–28.
With the fiscal outlook much improved from the early days of the Coronavirus Disease (COVID-19) pandemic, the trajectory for debt appears more favourable. For 2023–24, the DBRS Morningstar-adjusted debt-to-GDP ratio is expected to increase to 53.4% as nominal GDP declines on weaker commodity prices. The debt ratio should then stabilize around that level through 2027–28—a level that is better than anticipated at the time of DBRS Morningstar's last review in August 2022.
Unlike in the rest of Canada, real GDP growth is expected to improve in 2023 primarily because of increased mineral production and higher capital investment. The Province anticipates real GDP growth of 2.8% in 2023; however, nominal GDP growth is expected to turn negative as commodity prices soften. Additionally, heightened near-term macroeconomic risks raise the prospect of a greater-than-anticipated decline in prices for Newfoundland’s key commodities, which could stall, or potentially reverse, improvement in its fiscal and debt outlook.
CREDIT RATING DRIVERS
Further ratings improvement is not anticipated in the near term. Conversely, a material deterioration in fiscal performance and debt metrics and/or absence of a successful rate mitigation plan may result in a negative rating action.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023)
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodology:
-- Rating Canadian Provincial and Territorial Governments (https://www.dbrsmorningstar.com/research/413265; April 28, 2023).
The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (https://www.dbrsmorningstar.com/research/411694; March 28, 2023).
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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The credit rating was not initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.
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