While I was perusing the #nbpoli hashtag on Twitter today, I read an interesting tweet from Daniel Hatfield. Hatfield, a Tory supporter, was needling Liberal MLA Bill Fraser on New Brunswick’s financial situation. Hatfield says “are u aware that nationally we are the only province on negative credit watch? Thanks @NB_Liberals”. I had heard this refrain before from Tories, accusing the former Liberal government of pushing the province to edge of financial ruin. David Alward himself has said we are in a “fiscal crisis”. MLA Glen Tait invoked the “financial crisis” term when questioning duality of schools. So, when Hatfield questioned the credit rating of New Brunswick, I wanted to do a little homework to see how we really compare with other provinces in Canada.
I started with credit rating by Standard and Poor’s. Hatfield is right; New Brunswick is the only province with a “Negative” outlook rating from S&P. This outlook change happened in June 2011, when they said the following:
“Credit concerns include our view of the significant deterioration in the province’s budgetary performance since fiscal 2009 (year ended March 31, 2009), which continued in fiscal 2011… In addition, New Brunswick’s relatively high net tax-supported debt burden (net of sinking funds), rose further in fiscal 2011 to about 33% of GDP from about 30.6% in the previous fiscal year. The province expects it to rise further to about 36% in fiscal 2012… The negative outlook reflects our expectation that New Brunswick’s budget plan will not be enough to return the province to a balanced budget position in the medium term. Standard&Poor’s expects that as a result of this, the province’s net tax-supported debt burden will rise significantly beyond the level outlined in the fiscal 2012 budget.” (Source)
So yeah, not good news. However, in the same release S&P affirmed our long-term issuer credit rating of AA-, keeping it status quo. No downgrade. I know that’s cold comfort to some, but again my goal is to try to gather some objective viewpoints of the province’s finances. If we were indeed in a “fiscal crisis”, wouldn’t our credit rating have been downgraded? Perhaps it would be over time if we stayed on the same path, but it was never the plan to stay on the same path. The former Liberal government says the deficit spending was a short term measure to keep people working during the “Great Recession”. Fraser noted on Twitter that the Federal Tories followed the same plan. So agree or disagree, fact is even though the outlook was downgraded, the credit rating remained the same.
But, how do we compare in terms of our credit rating to other provinces? Here’s a breakdown (by the way, this table isn’t on Standard and Poor’s web site, I had to search for each province individually to pull it together.)
|Province||Foreign-Local Long Term||Outlook|
|Prince Edward Island||A||Stable|
|Newfoundland and Labrador||A+||Stable|
What do these ratings mean? According to S&P’s web site (http://www.standardandpoors.com/ratings/definitions-and-faqs/en/us), here are the definitions for the ratings:
- ‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.
- ‘AA’—Very strong capacity to meet financial commitments.
- ‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
Despite our present “fiscal crisis”, our S&P credit rating is the highest rating in the Atlantic Provinces (including “have” province of Newfoundland and Labrador). It’s also the same credit rating as Ontario and a higher credit rating than Quebec.
So that’s Standard and Poor’s rating. It’s nothing to write home about like BC, AB and SK, but it’s by no measure the worst. Compared to our Atlantic Canadian peers and Quebec, we are leading the pack.
“(T)he Canadian province’s Aa2 rating reflects a high degree of fiscal flexibility, manageable debt levels within the current fiscal framework and strong and reliable transfers from the federal government. The rating also reflects the province’s diversified economic base, offset by a weaker near-term revenue outlook and risks associated with the Point Lepreau nuclear generating station refurbishment project … New Brunswick has also recorded cash financing requirements in recent years, which has marginally increased the province’s debt burden, though the province’s net direct and indirect debt as a percentage of GDP remained relatively stable as the stock of debt grew broadly in line with GDP. However, the province’s debt burden increased to 113% of revenues at March 31, 2010 and is projected to increase to 133% of revenues by March 31, 2011, owing to large cash financing requirements recorded and estimated for 2009-10 and 2010-11.” (Source)
Here’s how we compare: (Again, this table isn’t on Moody’s web site, I had to search for each province individually to pull it together.)
|British Columbia||Aaa||Stable||Not on Watch|
|Alberta||Aaa||Stable||Not on Watch|
|Saskatchewan||Aa1||Stable||Not on Watch|
|Manitoba||Aa1||Stable||Not on Watch|
|Ontario||Aa1||Stable||Not on Watch|
|Quebec||Aa2||Stable||Not on Watch|
|New Brunswick||Aa2||Stable||Not on Watch|
|Prince Edward Island||Aa2||Stable||Not on Watch|
|Nova Scotia||Aa2||Stable||Not on Watch|
|Newfoundland and Labrador||Aa2||Stable||Not on Watch|
|Canada||Aaa||Stable||Not on Watch|
(Incidentally, a “Aa2” credit rating is also shared by the New England states of Maine, Connecticut, and Rhode Island. Other New England states have higher ratings. New York also has an “Aa2”. New Jersey is “Aa3”.)
- “Aaa: Moody judges obligations rated Aaa to be the highest quality, with the ‘smallest degree of risk’.
- Aa (Aa1, Aa2, Aa3): Moody judges obligations rated Aa to be high quality, with ‘very low credit risk’, but ‘their susceptibility to long-term risks appears somewhat greater’. (AA+, AA and AA- in S&P)
- A (A1, A2, A3): Moody judges obligations rated A as ‘upper-medium grade’, subject to ‘low credit risk’, but that have elements ‘present that suggest a susceptibility to impairment over the long term’. (A+, A and A- in S&P)”
“Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.” (Source: Moody’s Rating Symbols&Definitions, page 9)
How do we compare to other Canadian provinces according to Moody’s? Well, we are on par with other Atlantic Provinces as well as Quebec. We have the same rating as half of the New England states and New York. Also, our outlook is presently “Stable”, not “Negative” like the S&P rating.
Hatfield did mention that New Brunswick’s rating from Moody’s was downgraded in 2009 under the Liberal government from its rating of Aa1, which it earned in 2006 under Lord’s Tories. This is also true. In the release where the reduction was announced, Moody’s said:
“As a result of anticipated borrowing requirements, New Brunswick’s debt metrics are projected to weaken over the medium-term. Moody’s anticipates that net direct and indirect debt may increase to over 150% of revenues over the next four years, from an estimated 106% in 2008-09. Debt metrics of this magnitude would remain consistent with other Aa2 rated Canadian provinces and international peers…’Even though New Brunswick, similar to that of all Canadian provinces, benefits from a high degree of fiscal flexibility, the province’s long-term financial capacity to service its debt is also conditioned by an economic base that underperforms the national average on a number of growth, income and wealth metrics,’ says Mr. Marion.”
Not great news there. But, check out the next paragraph of the release:
“The rating action also reflects Moody’s assessment of the risks associated with New Brunswick Power (NBP). The narrowing of NBP’s margins in recent years, in conjunction with high leverage and risks related to the refurbishment of the Point Lepreau nuclear generating station, represents an element of risk for the NBP. As such, NBP’s provincially-guaranteed debt, which is borrowed by the province and on-lent to NBP, constitutes a contingent liability for the province.”
Moody’s lowered NB’s credit rating not only based on our debt picture, but also based on liability related to NB Power. This is the same crown corporation that Energy Minister Craig Leonard says has its debt under control. Moody’s mentions not only liability related Point Lepreau but also the overall debt and profitability, which aligns more closely with the views of former Energy Minister Jack Keir. So, even if Minister Leonard thinks NB Power is doing just fine, its finances played a key role in the province’s credit rating downgrade. It appears that Moody’s doesn’t agree with Minister Leonard’s assessment of the risk NB Power’s finances pose to the province.
In summary, Moody’s sees us as on par with many of our peer provinces and states. Will that change when the next review comes out (this month perhaps)? We shall see.
Ok, so perhaps you may be persuaded that our credit rating is average when compared to others. How does our debt compare to other provinces? As Tim Jacques pointed out in the past, perhaps the fairest assessment might be comparing our Net Debt to GDP ratios. The Royal Bank just released new statistics in June 2011:
Here again we see our Net Debt to GDP ratio is worse than British Columbia, Alberta, Saskatchewan, Manitoba and Newfoundland. But, we are doing better than Ontario, Quebec, Nova Scotia and the federal government (latest stats for PEI are missing).
Am I saying that New Brunswick doesn’t have a serious financial situation? Of course not. Do we have a lot of work to do to resolve the deficit and debt problem? Absolutely. But, I’m weary of the hyperbole from the government and its supporters on our province’s financial standing. We all know that the state of the province’s finances needs to be addressed and the deficit must be eliminated in the upcoming years. But while the government and its supporters want us to believe that the Liberals left us on the brink of financial ruin, it seems to me that we are at the median of our Canadian peers when comparing credit ratings and debt. We can do better, but perhaps we can dial down the “financial crisis” rhetoric a little bit. Also, we should be very critical about what we are giving up in the name of fiscal austerity.
Any thoughts? Tweet me…
Update: The Telegraph Journal did a nice article on this topic on August 11, and adds some context and new information to the points above (see http://telegraphjournal.canadaeast.com/front/article/1430931).