DBRS Changes Trend on Long-Term Ratings of Prince Edward Island to Positive, Confirms Ratings at A (low) and R-1 (low)

DBRS Limited (DBRS) changed the trend on the Issuer Rating and Long-Term Debt rating of the Province of Prince Edward Island (PEI or the Province) to Positive from Stable. DBRS also confirmed the Issuer Rating and Long-Term Debt and Short-Term Debt ratings of PEI at A (low), A (low) and R-1 (low), respectively. The trend on the Short-Term Debt rating remains Stable.

DBRS changed the trend to Positive because of the sustained improvement in the provincial credit profile. The Province has reported balanced operating results in each of the last two years and appears credibly committed to maintaining balanced budgets through the medium term. Combined with a relatively strong economy, the improved budgetary results have resulted in the provincial debt burden declining. DBRS expects the debt-to-gross domestic product (GDP) ratio to continue to fall through the medium term. If these trends are sustained over the next 12 to 18 months, DBRS is likely to upgrade the Province’s Issuer Rating and Long-Term Debt rating to “A.”

The Province maintained a balanced budget for a second consecutive year in 2017–18 and has projected a surplus of $1.5 million. The result was consistent with the budget forecast and the prior-year result. On a DBRS-adjusted basis, the result equates to a deficit of $35.6 million, or 0.5% of GDP, which is among the smallest of Canadian provinces.

The economy remains supportive of the improving credit profile. Economic growth has been relatively strong in recent years, supported by exceptional population growth. With strong population growth expected to persist, economic activity is expected to remain relatively strong but may moderate over the medium term.

The Province’s 2018 budget remains consistent with the policy direction set out in previous years. The budget remains balanced, though spending is rising relatively quickly in light of growth in equalization and targeted federal transfers. The budget not only provides significant funding to address population-related pressures in core ministries but also announced a number of measures that appear to preface an early election call by the premier. With rising capital investment, the deficit, on a DBRS-adjusted basis, is estimated to be $56.5 million, or 0.8% of GDP.

DBRS projects that the DBRS-adjusted debt burden will fall modestly to 39.2% of GDP as at March 31, 2019, and with balanced budgets and declining capital investment, the DBRS-adjusted debt-to-GDP ratio should continue to fall through the medium term, potentially reaching 37.0% in 2020–21.

A positive rating action is likely over the next 12 to 18 months if the outlook for budgetary results and debt persists. DBRS could change the trend to Stable if the Province’s fiscal and debt outlook deteriorates.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Provincial Governments, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.