The fiscal shock of the COVID-19 pandemic, coupled with lingering impacts of the slump in oil prices that began in 2014, has delivered a blow to Alberta's credit rating.
S&P Global Ratings, a major debt-rating agency, has downgraded the province's credit rating from 'A+' to A and warned that further downgrades are possible if new fiscal measures are not adopted during the post-pandemic recovery.
The New York-based credit agency said Monday that Alberta's budget was hit harder by COVID-19 than expected.
The debt burden has ballooned, revenues have shrunk and government spending has surged, the agency said.
'Powerful economic shocks'
"The downgrade is the culmination of the two powerful economic shocks that Alberta has endured in the past six years," S&P analyst Stephen Ogilvie said in a statement.
"The province entered the pandemic in a position of relative fiscal weakness because of the prolonged effects of the slump in oil prices that began in late 2014."
Still recovering from the downturn in oil prices, the province was unprepared for the economic impact of the pandemic, the agency said.
Oil prices have continued to languish while steps taken to control the pandemic and safeguard public health drove up spending and undercut revenues, S&P said.
Alberta's operating and after-capital deficits are the largest of any local and regional government in the country this fiscal year and last, it said.
During the latest budget update delivered in February, Alberta's United Conservative government confirmed that pandemic spending had derailed its plans for a balanced budget.
Finance Minister Travis Toews predicted finishing the 2021-22 current fiscal year with a deficit of about $20 billion. That's almost three times what the province projected before the pandemic took hold.
He also predicted the debt could climb to $116 billion by March 31, 2022, when the current fiscal year ends.
Facing one of the largest deficits in the province's history amid a health crisis, Toews said his government had no choice but to delay its plans for a fiscal reckoning on spending.
In a statement to CBC News on Wednesday, Toews said an unprecedented drop in energy prices and the pandemic have combined to hit Alberta's finances "much harder" than other jurisdictions.
He said the province also inherited an "unsustainable spending trajectory" from the previous NDP government.
Toews said the UCP government's commitment to responsible fiscal management will improve Alberta's financial standing in the long term.
"Of course, a credit downgrade is unwelcome news," he wrote.
"However, we don't believe this downgrade will affect our ability to borrow in the capital markets. Alberta has an excellent reputation and track record in the capital markets and we expect that to continue."
Alberta is expected to remain in the red for years to come, S&P predicts.
The agency calculates that Alberta's debt will reach almost $150 billion — or 305 per cent of operating revenues — by the end of fiscal 2023-24, up from 205 per cent of operating revenues at the end of fiscal 2019-20, when the pandemic began.
After-capital deficits are expected to average more than 25 per cent of total revenues during fiscal years 2020-2024, the agency said.
S&P predicts Alberta's real GDP will increase 4.8 per cent in 2021, following a 7.8 per cent contraction in 2020.
The firm's short-term rating for the province — reflecting the likelihood that a borrower will default within the year — remains unchanged at 'A-1' and its outlook for the province remains stable, based on the assumption that Alberta's debt will shrink during the post-pandemic recovery.
But the agency said it may change its outlook to "negative" and further downgrade the province's credit rating if the recovery takes longer than expected.
The government needs to make "clear progress on increasing fiscal sustainability" or risk languishing behind the rest of Canada, Ogilvie said.
"The fiscal recovery will rely on economic growth and continuing strict expenditure management to do much of the heavy lifting, and these efforts can often take longer than expected to come to fruition and might not fully address the imbalance between revenues and expenditures."