DBRS Confirms Province of New Brunswick at A (high) and R-1 (middle)

DBRS has today confirmed the Long- and Short-Term Debt ratings of the Province of New Brunswick (New Brunswick or the Province) at A (high) and R-1 (middle), respectively. The trend on both ratings remains Stable. Similar to the situation in other provinces, weak economic conditions in New Brunswick are expected to place a strain on fiscal results, as evidenced by declining revenues amid ongoing spending growth. Furthermore, the Province’s 2009 budget introduced significant tax reform designed to foster long-term economic growth, and is expected to further dampen fiscal results over at least the next four years. In the short term, the tax package does provide some stimulus, but represents something of a deviation from the conservative fiscal management demonstrated in the past. Nevertheless, New Brunswick’s modest debt burden and sound liquidity provides reasonable flexibility to weather the downturn.

Following a DBRS-adjusted deficit of $471 million in 2008-09 – double the original expectations – a further shortfall of $969 million (3.6% of GDP) is anticipated in 2009-10. The centrepiece of the 2009 budget was the decision to undertake significant personal and business income tax cuts. Spread out over four years, the tax reform should help revive the economy over the longer term, although the dent this creates in the fiscal outlook raises some concerns for DBRS. Higher spending for health and education, rising pension expenses, and significant capital expenditures will also contribute to the current year deficit. Deficits are likely to continue in the years ahead as New Brunswick’s aggressive plan to limit average spending growth to 1.3% over the four-year plan leaves little room for improvement in the Province’s financial profile without robust revenue growth.

Based on budget projections, the debt-to-GDP ratio is expected to rise to 32% in 2009-10, from 29% the previous year. New Brunswick’s debt burden is likely to continue rising over the forecast horizon but should, nonetheless, remain manageable provided the economic recovery starts to take hold, helping to stabilize the debt-to-GDP ratio at around 35% by 2012-13.

A contraction of 0.3% in real GDP is assumed in the budget for 2009, compared with a private sector average decline of 1.0%. Provincial capital spending will not be sufficient to offset the decline in non-residential investment by the private sector as large projects including the liquefied natural gas plant and Point Lepreau nuclear refurbishment reach completion this year. The private sector consensus calls for a rebound in growth to 1.9% in 2010, as export demand gradually begins to recover and the major tax cuts start filtering through the economy. However, it will likely take time to fully evaluate the benefits of this year’s tax reform. As a result, despite a marked deterioration year-over-year, the medium-term plan laid out by the Province is viewed by DBRS as manageable, though a slower-than-expected recovery could require significant corrective measures to ensure fiscal sustainability.

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

The applicable methodology is Rating Canadian Provincial Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.