Moody's downgrades Alberta's credit rating, citing continued dependence on oil

Alberta's credit rating has been downgraded by Moody's, with the agency citing the volatility in the province's dependence on oil and continued fiscal pressures.

The province's rating was downgraded to Aa2 stable from Aa1 negative on Tuesday.

The downgrade, the agency states, reflects Moody's "opinion of a structural weakness in the provincial economy that remains concentrated and dependent on non-renewable resources … and remains pressured by a lack of sufficient pipeline capacity to transport oil efficiently with no near-term expectation of a significant rebound in oil-related investments."

The agency's rating stated that continued spending cuts will be needed for the government to balance the budget by its set target of 2022.

"Moody's notes that the province's forecast of a cumulative three per cent decline in operating expenses by 2022-23 is somewhat ambitious which will require sustained political discipline," the release read.

"Macroeconomic factors, which influence oil-related revenue growth and private sector investments in the oil sector, remain outside the control of the government. As a result, the government's fiscal projections are subject to material execution risk."

You know, until we can wean ourselves off of royalty revenues to fund government operations, we're going to be exposed to reports like this anytime oil prices fall. - Trevor Tombe, University of Calgary

Duane Bratt, a political science professor at Mount Royal University in Calgary, said Moody's is clearly moved by signals the government is ramping up for a labour battle. 

On Friday, unions were told to expect thousands of public sector job cuts.

"That's basically saying, 'We've seen your budget plan. We see what you want to do. We see the confrontation you're about to have with unions to deal with those wage pressures.' They're not sure that the government is really going to go through with it or not. I think the government is going to go through with it," Bratt said. 

Another factor the report outlines as a concern is environmental risk.

"Alberta's oil and gas sector is carbon intensive and Alberta's greenhouse gas emissions are the highest among provinces. Alberta is also susceptible to natural disasters including wildfires and floods which could lead to significant mitigation costs by the province," the report states.

Alberta Finance Minister Travis Toews said he was disappointed by the rating, which he blamed on the previous government.

"We've got a premier that's doing everything he can to advance the cause of additional pipeline access. Unfortunately, the previous government did not get a lot done in that area, and we won't make that mistake," he told reporters on Wednesday.

Toews noted in a release that the agency did give the province a stable outlook, and said since the release of the province's budget in October many economists and financial institutions have signalled that the budget is "getting our province back on track."

Bratt said with a downgrade, it's not easy to point to one factor or another — but said governments often will.

"In particular, this government just simply said, 'Well, it's the NDP's fault, they put us in a large deficit situation and we're trying to claw a way out and we haven't done it yet,'" Bratt said. "The problem with that argument is the UCP already had an opportunity at producing a budget and it obviously did not impress Moody's because the deficit went higher than the previous."

Corporate tax cut will pressure revenues: Moody's

The Official Opposition fired back, pointing to factors in Moody's rating such as the statement that the province's cut to corporate income tax rates and the elimination of the carbon tax will put pressure on revenues, and that the province's debt burden will be stabilizing at a higher burden than forecasted.

"When we were in government, we saw the price of oil go down $80 per barrel. The price of oil has been stable since Jason Kenney's been premier. This downgrade has been entirely self-inflicted," NDP Leader Rachel Notley said Wednesday.

"Albertans were promised a government that would focus on improving the economy, and what they are getting instead is a government that's so ideologically committed to their failed strategy that they are jeopardizing the economics, health and security of this province."

Trevor Tombe, an associate professor of economics at the University of Calgary, said the downgrade is pretty consistent in its assessment of Alberta's risk due to the importance of the oil and gas sector to the province's budget.

"You know, until we can wean ourselves off of royalty revenues to fund government operations, we're going to be exposed to reports like this anytime oil prices fall," he said.

But, he said the agency's biggest concern seems to be the province's path to future debt and balance.

"Debt levels will continue to be rising even when we balance the books in 2022-23. So just balancing on the operating side does not itself mean that we won't continue to accumulate debt because things like capital projects affect debt levels even though it doesn't directly count as an expense," he said.

Bratt said he can see three big factors to Alberta's deficit increase, and two directly relate to drops in revenue — the corporate tax reduction and the end of the carbon tax. The third he said, was the penalty for getting out of oil by rail.

Alberta is projected to end the 2019-20 financial year with an $8.7 billion deficit, up from $6.7 billion for 2018-19. 

"You may make the case, and the government does, that in the long run those will benefit the economy by stimulating investment in jobs. But in the short run, it had a big impact on the budget and Moody's obviously was paying attention," Bratt said. 

Moody's also downgraded the long-term debt ratings of the Alberta Capital Finance Authority and the long-term issuer rating of ATB Financial to Aa2 from Aa1.