04 May 2005

DBRS upgrades province's debt rating

In a news release issued on 02 May 05, the Dominion Bond rating Service (DBRS) upgraded the provincial government's long- and short-term debt rating.

Long-term debt is now set at BBB (High) and short-term debt is rated at R-1 (low).

According to DBRS, the rating changes are due to several factors, including a 20% reduction in the province's debt over the past seven years.

DBRS noted the offshore revenue agreement with Ottawa also supports the improvement in the province's rating. In light of recent comments by the premier that suggest the $2.0 billion cash advance may be sued to finance hydroelectric, development in Labrador, it is interesting to note this comment by DBRS: "No use has been earmarked for the money yet, but balance sheet improvement is likely to be a priority, given earlier statements made by the Premier." [Emphasis added]

DBRS is obviously basing its rating in part on the commitment that the offshore money will be used for debt reduction.

According to DBRS, they have calculated that the province's cash deficit was eliminated in Fiscal Year (FY) 2004.

When Budget 2004 was introduced, the government stressed the growing debt and deficit situation affecting the province. It is interesting to note that DBRS highlighted a significant reduction in debt over a seven year period. In other words, they are upgrading the debt rating based on actions that date back to Liberal administrations who were pilloried in last year's partisan rhetoric.

As noted in other posts on the Robert Bond Papers, the Government of Newfoundland and Labrador achieved significant debt reduction since at least FY1998. In fact, the province's direct debt declined each year between FY2000 and FY2003.

Further debt load improvements started in the early 1990s with a concerted plan to reduce both the total amount and the percentage of debt held in foreign currencies. From a position of almost 50% of debt being in foreign currencies in FY 1994 - and subject to increased costs from currency fluctuations, the province currently holds less than 25% of its direct debt in foreign currency. This foreign currency debt is now entirely held in American dollars. This further reduces the cost of servicing this debt, given the relatively strong value of the Canadian dollar in relation to its American counterpart.

So much for the argument about Liberal fiscal mismanagement.

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