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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Long-Term Debt and Short-Term Debt ratings of the Province of Manitoba (Manitoba or the Province) at A (high), A (high) and R-1 (middle), respectively. All trends are Stable. At the same time, the Long-Term and Short-Term Obligations ratings of The Manitoba Hydro-Electric Board are confirmed at A (high) and R-1 (middle), respectively, also with Stable trends.

The Province’s credit profile continues to be supported by a stable, resilient and growing economy and a debt burden that remains commensurate with the ratings. Notwithstanding this stability, the Province’s operating results have failed to improve in recent years, and without a concerted effort to reduce operating deficits and slow debt accumulation, the flexibility within the existing ratings may be eroded.

Preliminary results for 2015–16 indicate that the deficit widened significantly to $1.0 billion from a budgeted deficit of $422 million. On a DBRS-adjusted basis, which recognizes capital expenditures as incurred as opposed to as amortized, this equates to a deficit of $2.0 billion, or 2.8% of gross domestic product (GDP). As a result, DBRS-adjusted debt is estimated to have risen to $27.6 billion, or 42.0% of GDP, as of March 31, 2016.

The economic outlook for 2016 remains largely similar to previous years. The Province expects reasonably strong growth in both 2016 and 2017, though forecasts have weakened slightly since the time of the budget. The private sector consensus tracked by DBRS suggests growth of 2.2% and 2.1% in 2016 and 2017, respectively. Continued gains in manufacturing and export-oriented industries are expected to offset weakness in residential and non-residential investment.

Despite consistent economic growth in recent years, the Province has posted increasingly large operating deficits. The newly elected PC Government tabled a budget within six weeks of election night. As such, the budget focuses on the current year and the expenditure plan is consistent with that of prior years. The budget projects a deficit of $911 million, or $1.75 billion on a DBRS-adjusted basis (2.6% of GDP). Initial indications from the new government suggest a reluctance to raise taxes or make sharp and immediate spending reductions. The focus appears to be on continuing to invest in strategic infrastructure and slowing expenditure growth without significantly affecting front-line services. With this, the government has indicated that it is unlikely to balance the budget until its second term in office (i.e., it could take up to eight years). DBRS estimates the debt burden will rise to $30.1 billion, or 44.1% of GDP, by the end of 2016–17 and expects it could climb further in subsequent years, though the trajectory is uncertain in the absence of a more detailed multi-year fiscal plan.

A negative rating action is not expected in the near term but could occur if operating results deteriorate significantly and the outlook for debt burden increases sharply. A positive rating action, while unlikely, would require a material improvement in operating results and a substantial reduction in the debt burden.

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

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.