DBRS Confirms Province of Prince Edward Island at A (low) and R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Long-Term Debt and Short-Term Debt ratings of the Province of Prince Edward Island (the Province) at A (low), A (low) and R-1 (low), respectively. All trends are Stable. Notwithstanding ongoing weakness in operating results and a shrinking labour force, the Province’s debt burden has begun to decline and the outlook for operating results is improving.

Preliminary results for 2015–16 indicate that the deficit widened to $27.7 million from the budgeted deficit of $20.0 million. On a DBRS-adjusted basis, which recognizes capital as incurred as opposed to as amortized, this equates to a deficit of $49.2 million, or 0.8% of gross domestic product (GDP). The weaker result was largely driven by increased health, benefits and capital spending. Encouragingly, the debt burden fell modestly to 44.5% of GDP from 45.2% of GDP, as economic growth more than offset nominal debt growth.

The 2016–17 budget projects a modest deficit of $9.6 million and a return to balance in the following year. On a DBRS-adjusted basis, this equates to a deficit of $18.9 million, or 0.3% of GDP. With continued economic growth and improving operating results, DBRS estimates that the Province’s debt burden could fall toward 40% over the medium term, although this remains well above pre-recessionary levels, which tended to range between 30% and 35% of GDP.

The gradual improvement in operating results has been positive; however, the Province will face significant challenges over the medium term in maintaining a balanced operating result. The population continues to age, which is putting pressure on government services while simultaneously reducing the size of the working-age population. Moreover, growth in federal transfers is expected to slow and expenditure pressures are likely building after years of restraint.

Notwithstanding these challenges, the political tone seems to be shifting under the current government, with an increasing emphasis being put on improving the Province’s long-term economic and fiscal prospects. While encouraging, few policy measures have been introduced to date and DBRS expects that the Province will face challenges in meaningfully supporting population growth through attraction and retention given the limited economic opportunity relative to larger provinces.

No rating action is expected in the near term. A strong and sustained improvement in operating results leading to a material reduction in debt could trigger a positive rating action, while a material increase in debt because of weaker operating results or a significant economic shock could trigger a negative rating action.

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

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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.