DBRS Confirms Province of Saskatchewan at AA and R-1 (high)

DBRS Limited (DBRS) has today confirmed the Issuer Rating, Long-Term Debt and Short-Term Debt ratings of the Province of Saskatchewan (Saskatchewan or the Province) at AA, AA, and R-1 (high), respectively. All trends are Stable. DBRS has also confirmed the ratings of Saskatchewan Power Corporation (for more information, see Saskatchewan Power Corporation report published September 10, 2015).

The Province’s effective and responsive approach to fiscal management, low debt burden and resilient economy provide it with ample flexibility to address the challenges associated with weakness in the commodity sector.

The Province reported a deficit of $1.5 billion for the 2015–16 fiscal year, which was largely the result of the sharp decrease in resource revenue and a large one-time, non-cash pension expense that resulted from changes in actuarial assumptions. On a DBRS-adjusted basis, which recognizes capital expenditures as incurred as opposed to as amortized, this equates to a deficit of $2.3 billion, or 3.0% of gross domestic product (GDP). With this, DBRS-adjusted debt rose to $14.6 billion, or 19.0% of GDP.

The economic outlook for 2016 remains subdued, given the persistence of low commodity prices and their impact on business investment, profitability and, ultimately, household incomes. Real GDP is expected to contract by 0.6%, though it is thought that 2016 will be the bottom of the recession, as commodity prices should begin to move higher on reduced supply. Notwithstanding the improved outlook for future years, there remains considerable uncertainty regarding the path of prices over the near term.

The budget projects a deficit of $434 million in 2016–17, which equates to a DBRS-adjusted deficit of $1.5 billion. Including the impact of the unusual pension expense in 2015–16, total expenditures are expected to decline (-2.6%) and revenue is expected to rise (+2.9%). Stripping out the impact of the pension expense, the budget provides for modest expense growth (+2.0%) to relieve pressure in high-demand program areas. With this, the DBRS-adjusted debt is expected to rise to $15.6 billion by March 31, 2017, or 21.0% of GDP.

The government has stated it intends to return to balance in 2017–18, though this will require continued revenue growth and significant cost restraint. Given the continued weakness in the economic outlook and a general reluctance to impact frontline services, DBRS believes the Province will be challenged to balance in 2017–18. DBRS expects the debt burden will stabilize in the near term.

A negative rating action is not expected in the near term, but could occur if operating results worsen and lead to a significant increase in the debt burden. A positive rating action could occur given the current outlook, but would likely require the economy stabilizing and the government posting strong operating results.

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.

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