Originally posted 6 December 2017
On 29 November, DBRS issued a press release affirming its decision to downgrade the province’s rating to AA from AA (high). In its opinion the downgrade was “necessitated” by “large operating deficits and rapid debt accumulation.” In addition to the downgrade, DBRS maintained its negative trend-
because the Province has yet to demonstrate any real willingness to address the weakest budget outlook among all provinces, despite high levels of per capita spending and the lowest tax burden in the country. DBRS is concerned that the plan to return to balance relies on a recovery in resource revenues, rather than fundamental adjustments to the budget. As a result, debt will continue to rise and there is no clarity as to when the credit profile will stabilize (emphasis added).
The foregoing highlights the question why does the Alberta state not use its vaunted Alberta Advantage to least begin reducing the yawning budgetary gap. The answer to that question is, presumably, the existence of a united right and Albertans’ historical aversion to paying taxes. As Minister Ceci remarked a week ago “no sales tax because Albertans don’t want one.”
Further, the agency noted:
DBRS believes that proposed expense measures will be insufficient to meaningfully address the fiscal imbalance. The Minister of Finance reiterated his commitment to protect frontline services and fund volume pressures in health and education, while signalling that modest expense measures are to be implemented, including hiring restraint, achieving affordable labour agreements and other efficiencies. (emphasis added)
It is highly unusual for a rating agency to refer directly to the Minister of Finance of a province in press releases or analyses. This likely reflects the frustration of DBRS analysts (and probably those at Standard & Poor’s and Moody’s) hearing the Finance Minister respond publicly to rating reports by stating that credit ratings are, in effect, only one factor in managing a provincial budget. See past statements. With each downgrade, the Finance Minister has repeated the theme of acting in the best interests of Albertans.
DBRS could revise the trend to Stable if the Province were to introduce a credible plan that resulted in the debt-to-GDP ratio stabilizing around the levels currently expected. While a further rating action is not anticipated in the near term given that there is some flexibility within the current rating category, Alberta’s fiscal outlook remains the weakest among all Provinces and risks remain tilted to the downside.
The gauntlet thrown down in the press release was the need for a credible plan.
As Alberta has proceeded from a AAA (Moody’s) in January 2016 to a AA (Negative trend) (DBRS), A+ stable (S&P), and Aa1 (Moody’s), investors in Alberta paper will be closely scrutinizing Alberta’s upcoming budget for evidence of a credible plan to restore fiscal sustainability.