The next downgrade

On 30 June FitchRatings downgraded the provincial rating from AA to AA- and revised its ratings outlook on long-term debt to negative from stable. Although there was nothing surprising about the downgrade, in view of the Province’s deteriorating fiscal position, several statements are noteworthy.

First, the report came one day after the Alberta Economic Recovery Plan was announced, Fitch remarked there was a lack of updated financial information. Fitch’s initial timing of the report may have been dictated by the expectation that audited financial statements for the last fiscal year would be available. This turned out not to be the case as the Government amended the Fiscal Planning and Transparency Act to give the Government until the end of August to complete the financial statements. So Fitch was left in a position of accepting the public comments about a “$20 billion deficit” for the current fiscal year without any detail.

The downgrade of the province’s IDR is due to Fitch’s expectation that sharply higher provincial borrowing during the pandemic-driven economic crisis and in the recovery to follow will result in a debt burden relative to GDP that is incompatible with a ‘AA’ rating. As the province has neither formally detailed the extent of its current fiscal challenges nor provided firm details on a path toward an eventual recovery, the Negative Outlook reflects the risk that stressors identified in Fitch’s rating case crystalize, leading to further deterioration in credit quality

Fitch was able to “consider” the stimulus plan announced on 29 June, noting: “although details on plan impacts to revenues, expenditures and debt issuance is not yet
available and additional policy responses will be necessary as the province navigates the recession.”

Second, Fitch claims to be the first rating agency to systematically publish an opinion about what ESG (Environmental, Social, Governance) issues are relevant and material to individual entity credit ratings. In the case of Alberta has an ESG Relevance Score of 4 for

Biodiversity and Natural Resource Management due to its exposure to the impact of natural resources management on economy and governmental operations which, in combination with other factors, has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

It is unfortunate that Fitch does not highlight the reasons for this view. It is probably a good guess that the current regulatory system, governing the vast environmental liabilities of private sector actors, will attract greater interest as time goes on.

Given the announced “fulsome” economic and fiscal update” promised by Finance Minister Toews later in the summer, we expect the other rating agencies will hold off adjusting ratings until sometime after that update.