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

DBRS has today confirmed the long- and short-term ratings of the Province of New Brunswick (the Province) at A (high) and R-1 (middle), respectively, both with Stable trends. The introduction this year of multi-year fiscal and capital plans adds credibility to the effort announced in 2010 to return to balance by 2014-15. If achieved, this should ultimately help to stabilize the debt burden and ensure that credit metrics remain supportive of the current ratings.

Based on preliminary results, New Brunswick recorded a deficit of $471 million in 2011-12. On a DBRS-adjusted basis, after recognizing capital expenditures as incurred rather than as amortized, this translates into a shortfall of $620 million, or 2.0% of GDP, roughly in line with expectations. For 2012-13, a deficit of $183 million is forecast; however, large capital spending related to the Route 1 Gateway Project will result in a DBRS-adjusted shortfall of $739 million, or 2.3% of GDP. Based on the medium-term plan, a further deficit of $99 million is forecast for 2013-14 before returning to a small surplus in 2014-15. On a DBRS-adjusted basis this is likely to represent deficits of less than 1.0% of GDP as capital spending returns to more normal levels. While the projected improvement in fiscal outlook is encouraging, DBRS believes the fiscal plan entails considerable challenges, especially with respect to containing wage and salary growth as a number of agreements are up for renewal in the current year. In addition, below-average economic growth prospects will do little to enhance revenue growth.

DBRS-adjusted debt is estimated to have grown by 8.7%, or $844 million, in 2011-12. This was somewhat slower than anticipated, leaving the debt-to-GDP ratio at 34.3%. For 2012-13, higher capital spending, largely as a result of the Route 1 Gateway Project, will contribute to an increase in debt of 9.4%, boosting the debt-to-GDP ratio to 36.4%. Over the medium term, DBRS estimates that debt-to-GDP will fluctuate in the 35% to 36% range through 2014-15. While this marks an improvement from two years ago, when debt-to-GDP was expected to peak around 40%, it is nevertheless dependent on adherence to a tight fiscal plan and continued, albeit slow, economic growth.

For 2012, the Province is forecasting real GDP growth of 1.3%, which remains below the national average and is conservative in relation to the private sector consensus tracked by DBRS. Several large projects are expected to reach completion, including the Point Lepreau nuclear generating station refurbishment and the potash mine expansion in Sussex. As a result, public and private capital investment in the Province is expected to remain well below historical levels. The Province anticipates that real GDP growth will accelerate to 2.1% in 2013, somewhat above the current private sector consensus. Exchange rate volatility, the pace of U.S. economic recovery and capital investment levels continue to constitute key risks to New Brunswick’s outlook and may make the return to balance more challenging than expected.

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.