DBRS Confirms Prince Edward Island at A (low) and R-1 (low), Stable Trend

DBRS has today confirmed the Short-Term Debt and Long-Term Debt ratings of the Province of Prince Edward Island (PEI or the Province) at R-1 (low) and A (low), respectively. The trend on both ratings is stable. PEI benefits from a relatively resilient economy, which allowed it to ride out the recession with minimal economic impact. While PEI’s credit profile remains sound, the recession did have a fiscal impact from which the Province is still suffering and the deficits expected in the current year and in 2012-13 will result in additional debt eroding financial flexibility.

Based on the most recent available information, the Province closed out the fiscal year ending March 31, 2011, with a deficit of $53.7 million, or $139.5 million in DBRS-adjusted terms (i.e., taking account of capital expenditures as incurred rather than as amortized). This is a slight improvement over the $143 million DBRS-adjusted deficit that had been expected. At 2.9% of gross domestic product (GDP), PEI’s DBRS-adjusted deficit is tied for third largest among Canadian provinces despite having experienced a relatively mild slowdown during the recession of 2009. Public accounts for 2010-11 are expected to be released shortly and DBRS notes that, as has been the case with a number of provinces, better-than-projected results may be reported.

For 2011-12, a deficit of $42 million, or $126.7 million in DBRS-adjusted terms, is expected. Since new tax measures are limited to increases in tobacco and liquor taxes, amounting to approximately $10 million, and federal transfers are expected to remain flat, PEI will be dependent on economic growth and spending restraint to shrink its fiscal deficit. The Province has indicated that it intends to return to fiscal balance by 2013-14, although DBRS believes that this may be difficult to accomplish given uncertainty over federal transfers and the need to realize further cost savings.

PEI’s debt-to-GDP ratio stood at 41.1% in 2010-11 and is expected to rise to 42.4% in 2011-12. This represents the second-highest debt burden among Canadian provinces, a significant challenge for a small economy characterized by modest growth. The debt burden remains manageable at the current level, but the rate of debt growth experienced in recent years is unsustainable and further deterioration of the debt-to-GDP ratio will eventually put the rating under pressure. Beyond an intention to return to balance, no plan has been articulated to achieve this objective or to reduce the provincial debt level. DBRS believes that a credible plan would be beneficial to fiscal stability.

The non-volatile nature of the PEI economy means that growth is more stable but often lags the Canadian average. Real GDP growth in 2010 is estimated at 2.0%, consistent with budget 2010-11 projections but off the 3.2% pace for Canada as a whole. Growth of 1.7% is expected by the Province in 2011, a conservative assumption in light of an average private-sector forecast of 2.2%. For 2012, the average private-sector forecast is 2.1%. Along with tourism, exports of food products are the mainstay of the island economy; therefore, forecasts are vulnerable to economic distress in the Province’s most important export market, the United States. Given recent economic events in the United States, forecasts may be revised downward.

PEI is one of a number of provinces that will hold an election in the fall of 2011. Public opinion polls are infrequent in the Province, but indications are that the governing Liberal Party continues to enjoy a lead in popularity over its rivals. DBRS notes the current stage of the electoral cycle and expects the government to have more political flexibility to address PEI’s fiscal challenges at the time of the next budget.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Municipal Governments, which can be found on our website under Methodologies.