Future grim for Alberta, DBRS says, with province expected to blow through debt limits this year

EDMONTON – A globally recognized credit rating agency is sounding alarm bells on Alberta’s debt situation.

The Toronto-based agency DBRS, in a report issued Thursday, says with oil prices so low and also the government’s borrowing plans excessive, Alberta will exceed its very own self-imposed legislated debt limits this fiscal year.

The agency confirmed Alberta’s top-drawer triple-A credit score, but said the near future is grim.

“The negative trend reflects DBRS’s expectation the continued weakness in oil prices will contribute to a fabric erosion in the province’s fiscal performance and accumulation of debt,” said the DBRS report.

“DBRS believes the fiscal response is unlikely to be adequate to keep credit metrics in conjuction with the AAA rating, in particular maintaining a DBRS-adjusted debt burden below 15 percent of GDP,” it added.

“Debt is now likely to exceed 15 percent of GDP as early as (fiscal) 2016-17.”

Alberta, within law passed last year by Premier Rachel Notley’s NDP government, cannot borrow a lot money the total exceeds 15 percent of its gross domestic product.

Finance Minister Joe Ceci has said that 15 percent limit is critical to make sure that generations to come of Albertans aren’t saddled with crippling debt payments.

But he has noted other provinces undertake as much as 30 percent.

Notley’s government, in its first budget last October, ramped up infrastructure spending to $34 billion within the next five years regardless of the low cost of oil.

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When that is along with interest fees and borrowing to pay for day-do-day operations, Alberta’s debt is likely to reach almost $48 billion by the end of the decade.

However those debt projections are based on benchmark oil averaging US$50 a barrel this season and US$61 a barrel in the upcoming fiscal year that starts April 1.

That benchmark, West Texas Intermediate, started the year under US$40 a barrel and is now under US$30 a barrel.

Each $1 stop by the typical cost of oil over the course of annually siphons $170 million out of the province’s banking account – even though some of these losses are offset by a low Canadian dollar.

DBRS also downgraded the fiscal outlook for that province from stable to negative. A week ago, the credit rater Moody’s Investors Service issued the same downgrade.

Last month, the company Standard and Poor’s dropped its triple-A rating for Alberta right down to double-A plus.

At that time, Standard and Poors rated Alberta’s financial management “very strong” but it’s budgeting performance “weak.”

A stop by rating reflects a loss of confidence indebted management and leads to higher borrowing costs.
This may be the second time in less than two months that DBRS has weighed in on Alberta’s economy.

In its last report, issued on Nov. 30, 2015, DBRS affirmed Alberta’s triple-A rating and said the NDP budget plan was “manageable,” but warned that continued deterioration in oil prices “would be cause for concern.”

Ceci, in a statement, said the province is sticking with the long-term plan introduced in the October budget.

“Our government works to find efficiencies, but we won’t make reckless cuts that would just make a bad situation worse,” said Ceci.

The NDP plans to continue to modestly hike spending in key areas like health and education within the upcoming years. Hiring restrictions are in place, but Ceci says he won’t engage in widespread cuts to front-line services.

The infrastructure expenses are to assist spur economic growth and create jobs while taking advantage of low interest to catch on Alberta’s infrastructure deficit.

Notley’s team has additionally launched numerous programs and intends to diversify the economy.