In a news release, the company said the "negative outlook reflects our view of the uncertainty of the magnitude of the government's expected fiscal policy response to lowered offshore royalties and projected operating and after-capital deficits."
S and P's base-case forecast for 2014 to 2018 gives the government an "average operating deficit of about 7% of adjusted operating revenue and average after-capital deficits of close to 19%
of total adjusted revenues." S and P calls this weak. The company also said that it considers the government's "budgetary performance is subject to considerable
volatility, given its high reliance on resource royalties...."
The company said it considers both the province's debt burden and contingent liabilities level to be high. The company cited unfunded pension liability and the risk associated with Nalcor and Muskrat Falls as key issues in these areas. "We believe the province has an incentive to provide extraordinary government support to
Nalcor in the event of financial stress." Standard and Poor's also considered the government's luiqidity level to be low.
S and P noted the strong federal-provincial financial relationship, the provincial government's financial management history, and strong budget flexibility as factor's working in the provincial government's favour. "We believe that the province's economic and fiscal situation will make public acceptance of fiscal
measures, such as tax increases and spending reductions, much more acceptable
despite their unpopularity."
The negative outlook reflects the uncertainty of the magnitude of the government's expected fiscal policy response to lowered offshore royalties and projected operating and after-capital deficits. We could revise the outlook to stable if the newly elected government takes the fiscal measures necessary to establish an improving trend in its budgetary performance beyond fiscal 2017, and develops a credible plan to restore budgetary balance in the medium term. Conversely, we could take a negative rating action should the province's budgetary performance show signs of weakening further beyond what we expect for fiscal 2017, particularly if projected after-capital deficits remain near 23% of consolidated operating revenues or the tax-supported debt burden reaches 270% of projected consolidated operating revenues [currently 100%].
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