S and P lowers NL rating, cites uncertainty of fiscal policy #nlpoli

Standard and Poor's said on Friday that the company had lowered its credit rating for the Government of Newfoundland and Labrador and Newfoundland and Labrador Hydro from A+ to A with a negative outlook.

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%].

-srbp-

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:

Bond Raters and other things to wonders about #nlpoli

Cast your mind back a couple of years and you will probably remember finance minister Jerome Kennedy told us a couple of things.

One was that he expected the government would run deficits for three years, totalling about $1.6 billion.

The other was that surplus would follow after that.

Well, here we are three years later and the latest finance minister – we’ve had four in three years – is now saying we can expect to see another  five years of deficits before maybe, possibly, getting the budget into surplus in Year Six ALE. 

That’s ALE as in “after the latest estimate.”