DBRS Downgrades the Province of Alberta to AA and Confirms R-1 (high), All Trends Negative

DBRS Limited (DBRS) downgraded the Province of Alberta’s Issuer Rating and Long-Term Debt rating to AA from AA (high) and has maintained the Negative trend. DBRS has confirmed the Short-Term Debt rating at R-1 (high) and has changed the trend to Negative. DBRS has also downgraded the guaranteed Long-Term Obligations of Alberta Capital Finance Authority to AA from AA (high) and maintained the trend at Negative.

The downgrade reflects large operating deficits and rapid debt accumulation. The Province’s second-quarter update released November 28, 2017, forecasts a deficit of $10.3 billion in 2017–18, only slightly lower than last year’s deficit of $10.8 billion. The DBRS-adjusted debt-to-GDP ratio is expected to rise to 17.5% in 2017–18, from 15.4% the prior year, and rise sharply over the medium term because of large operating deficits and capital requirements. The DBRS-adjusted debt-to-GDP ratio may reach 24.0% by 2020–21 or earlier, and may potentially rise further.

DBRS has maintained the Negative trend because the Province has yet to demonstrate any real willingness to address the weakest budget outlook among all provinces, despite high levels of per capita spending and the lowest tax burden in the country. DBRS is concerned that the plan to return to balance relies on a recovery in resource revenues, rather than fundamental adjustments to the budget. As a result, debt will continue to rise and there is no clarity as to when the credit profile will stabilize.

DBRS believes that proposed expense measures will be insufficient to meaningfully address the fiscal imbalance. The Minister of Finance reiterated his commitment to protect frontline services and fund volume pressures in health and education, while signalling that modest expense measures are to be implemented, including hiring restraint, achieving affordable labour agreements and other efficiencies.

DBRS could revise the trend to Stable if the Province were to introduce a credible plan that resulted in the debt-to-GDP ratio stabilizing around the levels currently expected. While a further rating action is not anticipated in the near term given that there is some flexibility within the current rating category, Alberta’s fiscal outlook remains the weakest among all Provinces and risks remain tilted to the downside.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Canadian Provincial Governments and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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