Bond rating agency downgrades N.L. outlook from stable to negative
Newfoundland and Labrador's fragile economic standing took a dip Friday when one of the world's most influential financial companies downgraded the government's credit rating.
Standard & Poor's, which has been ranking N.L.'s fiscal performance for decades, dropped the government's rating from stable to negative, citing disruption from the ongoing pandemic and deflated oil prices as the cause.
"The negative outlook reflects the heightened risk that the pandemic disruption and oil price shock could prove longer than expected, which could weigh heavily on the province's important tax and oil royalty revenues," reads the credit agency's report, released Thursday.
"We will monitor these developments and look to Newfoundland's policy response to gauge how quickly the province can begin to reduce the very large after-capital deficit it will post in fiscal 2021."
The company said it could also lower the rating again over the next two years if it expects persistent external pressures, or an insufficient response from the provincial government, will result in sustained high after-capital deficits over the medium term.
Should Newfoundland and Labrador manage to limit the impact on its fiscal situation, S&P Global Ratings said it could revise its outlook to stable, once again, over the next 12 to 24 months.
"In addition, a significant advancement in oil prices that leads to sustained real GDP growth and increased investment could bolster the province's fiscal performance," the report said.
"An improvement in budget performance leading to more moderate after-capital deficits and sustained liquidity, with cash and investments of more than 80 per cent debt service, could lead us to revise the outlook to stable."
Meanwhile, S&P affirmed its 'A' long-term issuer credit and senior unsecured debt ratings on the province.
The company also affirmed its 'A-1' short-term issuer credit and commercial paper ratings on the province, and its 'A' issue-level rating on Newfoundland and Labrador Hydro's provincially guaranteed senior unsecured debt.
"The arrival of the COVID-19 pandemic in Canada is compressing provincial economies and undoing their fiscal gains of the past decade. We expect that social distancing will continue to curtail activity across all sectors of the Newfoundland economy for the first half of 2020 and significantly raise unemployment levels," the report reads.
Low oil price, weak budget
S&P said contraction of the economy as a result of significantly lower-than-projected Brent oil prices, combined with the impact of global controls put in place to slow the spread of COVID-19, will result in weaker budgetary results in the 2021 fiscal year.
"We forecast an operating deficit of about 26 per cent of operating revenues in fiscal 2021 and an after-capital deficit of about 30 per cent of total revenues," reads the report.
However, the company said it expects results will improve in 2022 and 2023 as COVID-19 restrictions lift and oil prices begin to improve, as well as the province's history of implementing tax increases.
"To date, the government has exhibited strong budgetary flexibility, implementing unpopular tax increases and spending reductions in response to the last fall in oil prices in 2014," says the report.
"We believe that the government will take further fiscal measures to mitigate any revenue shortfalls that might arise if oil prices remain persistently below expectations."
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