20 January 2016

Will DBRS re-do its rating for Newfoundland and Labrador? #nlpoli

Premier Paul Davis was proud of the fact that a bond rating agency had confirmed the province's credit rating.

Curiously, he never told anyone which rating agency it was and, as it seems,  very few if any news outlets reported on the release issued on November 19 by Dominion Bond Rating Service.

DBRS confirmed the provincial government's rating at "A" for long-term debt and "R-1 (Low)" for short-term debt.  They also confirmed Newfoundland and Labrador Hydro at 'A' for long-term debt and "R-1 (Low)" with stable trending.

What's interesting, though, is that DRBS doesn't seem to have had access to up-to-date financial information even though they issued the rating in late November 2015.  Here's the basis for the stable rating,  according to the news release:

For 2015-16, the Province has budgeted for another sizable shortfall of approximately $1.1 billion; however, given the ongoing weakness in commodity prices, this gap is likely to be even wider. On a DBRS-adjusted basis, this equates to a deficit of $1.3 billion, or 4.0% of GDP. Over the medium term, Newfoundland’s fiscal recovery plan forecasts gradually declining deficits until balance is restored in 2019-20. This points to deficits falling from 3.2% of GDP in 2016-17 to 0.5% of GDP in 2019-20; however, DBRS notes that this plan is based on gradually improving crude oil prices to support average revenue growth of 4.3%. At the same time, program spending growth is forecast to average just 1.0% which will make the upcoming labour negotiations challenging. Furthermore, the upcoming provincial election adds an element of uncertainty regarding fiscal policy over the medium term. DBRS estimates that the debt-to-GDP ratio will peak at just above 42% in 2017-18, although this could be even higher if fiscal targets are missed. The debt outlook remains within an acceptable range for the ratings, but rising debt will erode flexibility within the credit profile.
All DBRS did in November was adjust the spring forecast accrual deficit to fit its own modelling.
Their confirmation of the provincial government's credit rating and that of NL Hydro was based on outdated information, in other words.

Even writing with a knowledge of a drop in commodity prices, all of DBRS' forward-looking statements were based on the provincial government's own assessments from the better part of a year earlier and not on information from the fall of the year.

That should warn us, yet again, of the danger of accepting credit rating reports at face value or a politician's characterisations of them.

More importantly, though, we shouldn't be surprised if the bond raters come back very soon and down-grade the provincial government's rating.  It seems from his comments that the Premier has already accepted that such a thing is very likely to happen.