DBRS Confirms Province of Nova Scotia at A (high) and R-1 (middle), Stable Trends

DBRS has today confirmed the Issuer Rating of the Province of Nova Scotia (Nova Scotia or the Province) at A (high), along with the Long-Term Debt and Short-Term Debt ratings at A (high) and R-1 (middle), respectively. The trend on all ratings is Stable. The credit profile is supported by substantial liquidity, prudent financial management and gradually improving economic conditions. While fiscal performance disappointed in 2013-14 and the recovery plan has been delayed, projected deficits are viewed as manageable and should contribute to a stabilization of the debt burden within the next year.

Nova Scotia’s public accounts, released on July 31, 2014, revealed a deficit of $679 million for the year ended March 31, 2014. On a DBRS-adjusted basis, after recognizing capital expenditures as incurred rather than as amortized, this equates to a shortfall of $823 million or 2.1% of gross domestic product (GDP), notably weaker than the $106 million shortfall anticipated at the time of last year’s review. Total revenues came in below budget and were down by 1.8% from 2012-13, reflective of weak economic conditions and negative prior year adjustments. Spending was well contained, rising by just 0.8%; however, it exceeded budget expectations largely as a result of a sizable pension valuation adjustment to recognize the conversion of the Public Service Superannuation Plan to a joint trustee model. Total DBRS-adjusted debt (defined as tax-supported debt net of sinking funds plus unfunded pension liabilities) grew by 3.8% to reach $13.9 billion in 2013-14. This pushed the debt-to-GDP ratio up to 35.7% from 34.9% in the previous year, and represents the second-lowest debt burden among Atlantic provinces.

Based on the budget, the Province anticipates that real GDP growth will begin to accelerate to 1.4% in 2014 and 2.1% in 2015, which appears to be somewhat conservative relative to the current private sector consensus tracked by DBRS. While near-term risks are considered to be more balanced than they were last year, with export driven growth offsetting some weakness in the domestic economy, some longer-term challenges remain for Nova Scotia. Aging baby boomers and ongoing outmigration are expected to continue placing downward pressure on the labour force and it remains uncertain as to how much this will be offset by increased productivity.

For 2014-15, Nova Scotia forecasts a budgetary shortfall of $279 million. On a DBRS-adjusted basis, this translates into a deficit of $396 million, or 1.0% of GDP, which compares favourably with provincial peers. Total revenues are projected to rise by 5.9% based on an expected pick up in nominal GDP growth, while the Province aims to restrain spending growth to just 1.0%. DBRS notes that the spending increase is somewhat understated because of a sizable pension valuation adjustment recognized in the previous year. Without this adjustment, spending would be 4.2% higher. Furthermore, a number of public sector collective agreements are coming up for renewal and, as such, this presents some downside risk to the Province’s fiscal targets if not managed carefully. Over the medium term, the budget plan points to two more years of modest deficits followed by a return to balance in 2017-18. Despite the delayed return to balance, DBRS-adjusted deficits of 1.0% or less throughout the forecast horizon are only mildly weaker than anticipated at the time of last year’s review and are seen as manageable for the credit profile. As a result, the debt-to-GDP ratio is forecast to reach 36.0% in 2014-15, after which point it should at least stabilize, if not decline, in the years ahead.

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.

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

The applicable methodologies are Rating Canadian Provincial Governments and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

The Series AJ Government Guaranteed Debt of Nova Scotia Power Finance Corporation matured on April 27, 2014. As such, Series AJ has been removed from the Nova Scotia Power Finance Corporation’s debt listed below.