A DBRS Morningstar report finds that provincial and territorial credit profiles in Canada have generally stabilized or improved in recent years with improving economic conditions, stronger population growth, supportive federal policies, growth in conditional and unconditional transfers and a noticeable shift in public policy.
The report, titled “2020 Canadian Provincial and Territorial Government Outlook,” was authored by DBRS Morningstar’s Paul Le Bane, Travis Shaw, Aditi Joshi and Brenda Lum.
The overall outlook for provincial and territorial credit profiles remains broadly stable for 2020. Many of the positive drivers that have supported improvement to persist through next year, though the pace of improvement is likely to slow with moderating economic growth. Slower revenue growth is likely to create some challenges for provinces that are currently budgeting thin surpluses or facing more pronounced spending pressures, the report finds.
However, the report notes that public policy has been increasingly supportive of provincial and territorial credit profiles. Across the country, provincial and territorial governments are increasingly stressing the importance of balanced budgets, debt reduction, pro-growth economic policies and fundamental reforms to improve program delivery and outcomes. At the same time, the federal government has relieved some fiscal pressures faced by subnational governments by providing increased support for infrastructure and health care.
On the 16th of December, Canada's new minority Liberal government published its first Economic and Fiscal Update, which offered no major policy announcements or material changes in the economic outlook. In DBRS Morningstar’s view, the outlook for modest fiscal deficits is not a source of concern. Federal debt as a share of GDP is low at 31% and still projected to decline over time. Moreover, in the event of an adverse shock to the economy, the federal government has ample space to provide temporary fiscal support to the economy without putting stress on the AAA ratings.
Two provinces currently have trends other than Stable, which DBRS Morningstar expects to resolve. The first is Québec. Provided that fiscal management and overall performance remain consistent with DBRS Morningstar’s expectations, an upgrade of the province’s Issuer Rating and Long-Term Debt rating to AA (low) is likely. The second is Alberta. With increased confidence that the government is committed to balancing the budget and stabilizing the debt burden, DBRS Morningstar could revise the province’s current Negative trend back to Stable; however, a failure to reduce the deficit as planned and an increase in debt beyond anticipated levels could lead to a one-notch downgrade of the ratings to AA (low).
Here’s a look at each province’s expected rating:
