DBRS View
Originally posted 16 July 2017
On 7 July, DBRS confirmed the credit rating at AA(high) with a long-term ratings trend as negative for the Province of Alberta. DBRS Report This assessment came after analyzing the provincial budget and meeting with government officials.
Any rating is an opinion by the agency: in effect it is a subjective judgment on the likelihood of default by an issuer of debt securities. Such judgments are made in light of a financial analysis of the securities issuer’s financial statements and the economic outlook. A province’s finances and economy will be looked at in relation to like states or lander governments in Australia, Germany, and the United States.
Media comment focused on the statement that “The Province has not yet provided a credible plan to restore balance.” While noting the Province’s low debt burden, DBRS said “the fiscal plan demonstrates a lack of willingness to contain debt growth, which is likely to lead to a one-notch downgrade of the long-term ratings.” DBRS-adjusted debt rose by $14.1 billion during the last fiscal year rising to 15.4 per cent of GDP from 10.3 per cent in 2015. The agency recognized the economic turnaround but added that considerable risks remain including the outlook for global commodity prices and U.S. trade protectionism. Not only was the growing debt identified as a problem but also the provincial government’s “reluctance to use additional tax room.” DBRS also was skeptical about the province’s ability to meet its fiscal targets given the uncertain outlook for oil prices and “Alberta’s track record of weak fiscal discipline.”
Alberta Government’s Response
Very shortly after DBRS released its brief assessment, Treasury Board President and Finance Minister Joe Ceci issued a news release which stressed the affirmation of the AA (high) rating and which extolled the strength of the Alberta economy. Ceci’s release referred to RBC, TD Economics, and the Conference Board of Canada positive economic projections for Alberta. The release added that “Budget 2017 clearly maps out how we are reducing the deficit by nearly one-third over the next three years as we continue on our path to balance by 2023-24.” Moreover spending is being restrained to “below population growth plus inflation” which, along with economic growth will cause “the deficit to decrease over time.”
From a political perspective, the NDP government is clearly vulnerable to attacks from Wildrose and the Progressive Conservatives (soon to be the United Conservative Party?) on the credit rating front. Alberta’s borrowing costs have gone from lowest in the country to in the middle of the pack. The deadweight burden of interest on the public debt will cast a shadow over the province’s finances for at least a decade. Each dollar of interest payments is one less dollar for child care programs or funding for women’s shelters. The opposition parties will continue to paint the NDP government as fiscally irresponsible and now has the rating agencies’ opinions to blast the government with. This bashing will have considerable appeal not only on the right but also on that portion of the the right-centre and left-centre that prefer some of the progressive social policies brought in after 44 years of Tory rule. While the government inherited a disastrous fiscal situation, two years on it still seems to be relying on the historic approach of keeping taxes low and hoping for a royalty gusher.
It remains to be seen how transparent the opposition will be on its fiscal plans leading into the 2019 election. Bashing is probably more effective than a credible fiscal plan. Identifying where to cut government services is rarely a winning strategy and leaves a political party vulnerable to counter-attacks. Having worked in the province’s Treasury during the Getty-Johnston and Klein-Dinning period, the province faced very difficult policy choices. Rather than raising taxes, the government choose the path to cut spending significantly. East of the border in Saskatchewan Roy Romanov’s new government was left to clean up the fiscal mess of its predecessor, Grant Devine. Romanov and Janice MacKinnon, the finance minister, combined tax increases and program spending cuts to remedy the situation. MacKinnon was, and is, a highly credible figure who teaches public policy at the University of Saskatchewan. If the government wanted a credible, independent review of its financial position before the next election, it might think about creating a task force on the province’s finances with MacKinnon leading the panel. The province faces tough fiscal choices that are not going away anytime soon. Properly constituted, a study would give the NDP government much needed ammunition on the fiscal policy front.