N.L. debt rating trend moves from negative to stable, credit rating agency says

·2 min read
The latest provincial budget and a federal deal to help mitigate the costs of the Muskrat Falls project have improved Newfoundland and Labrador's debt rating trends. (Sarah Smellie/The Canadian Press - image credit)
The latest provincial budget and a federal deal to help mitigate the costs of the Muskrat Falls project have improved Newfoundland and Labrador's debt rating trends. (Sarah Smellie/The Canadian Press - image credit)

After downgrades from bond rating agencies due to low oil prices and the economic blow dealt by the COVID-19 pandemic, Newfoundland and Labrador's credit rating is trending upwards.

In a release Thursday, credit rating agency DBRS Morningstar says it improved the trends of the province's issuer and long-term debt ratings from negative to stable, with those ratings holding steady at A (low).

The agency attributed the improvement to a reduced deficit in the 2021 provincial budget and the recent agreement in principle between the province and the federal government for financial restructuring of the Muskrat Falls hydroelectric project.

The province's deficit is forecast "to fall sharply and steadily" over the medium term, the release said, while the $5.2 billion agreement with Ottawa means "existing provisions built into the budget for electricity rate mitigation are now no longer likely to be needed, resulting in potential improvement in Newfoundland's budgetary outlook."

DBRS Morningstar said a negative rating action "now appears less likely but could arise from material underperformance of current expectations." If deficits grow or if debt-to-GDP increases significantly, the province's ratings could slip further.

Newfoundland and Labrador's ratings will likely remain steady, as the agency said a positive rating is unlikely in the near term, unless the federal agreement on Muskrat Falls concludes with costs recouped through ratepayers and federal supports, the province's fiscal situation improves beyond expectations or debt-to-GDP returns to pre-pandemic levels.

"Current forecasts for economic recovery are largely contingent upon the pace of global economic recovery and associated impacts on commodity prices, production and major project investment, along with the province's ability to manage the ongoing [COVID-19] pandemic and vaccine rollout — much of which is subject to a reasonably high degree of uncertainty," Thursday's release said.

The trend of Newfoundland and Labrador Hydro's guaranteed long-term debt also improved to stable, while its short- and long-term debt ratings remained unchanged.

The trends on all short-term ratings remained stable, DBRS Morningstar said.

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