Province of British Columbia Rating Lowered To 'AA+' From 'AAA' On Pandemic's Blow To Fiscal Results And Debt
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Research Update:
Province of British Columbia Rating Lowered To
'AA+' From 'AAA' On Pandemic’s Blow To Fiscal
Results And Debt
July 7, 2021
Overview
PRIMARY CREDIT ANALYST
- The COVID-19 pandemic's blow to the provincial economy has turned after-capital results into Stephen Ogilvie
large deficits and is elevating the burden of tax-supported debt such that the Province of Toronto
British Columbia's (B.C.) key fiscal and debt metrics are no longer comparable with those of + 1 (416) 507 2524
'AAA' rated peers. stephen.ogilvie
@spglobal.com
- Accordingly, we are lowering our ratings, including our long-term issuer credit rating, on B.C. to
SECONDARY CONTACT
'AA+' from 'AAA'.
Bhavini Patel, CFA
- The stable outlook reflects our view that economic conditions will normalize in the next two Toronto
years as vaccination rates rise further from already high levels, leading to steady improvement + 1 (416) 507 2558
in fiscal results and a slowdown in the growth of tax-supported debt. bhavini.patel
@spglobal.com
Rating Action
On July 7, 2021, S&P Global Ratings lowered its ratings, including its long-term issuer credit
rating, on B.C., as well as its issue-level rating on British Columbia Hydro & Power Authority's (BC
Hydro) provincially guaranteed senior unsecured debt, to 'AA+' from 'AAA'. The outlook is stable.
Outlook
The stable outlook reflects our expectation that economic conditions will normalize in the next two
years as vaccination rates rise further, leading to steady improvement in fiscal results and a
slowdown in the growth of tax-supported debt. As well, we expect liquidity ratios will strengthen
as after-capital results improve.
Upside scenario
www.spglobal.com/ratingsdirect July 7, 2021 1Research Update: Province of British Columbia Rating Lowered To 'AA+' From 'AAA' On Pandemic’s Blow To Fiscal Results And Debt A return to near-balanced after-capital results and a declining trend in the province's tax-supported debt burden in the next two years resulting in improved comparability with 'AAA' rated peers, coupled with a resumption of B.C.'s historically strong economic performances and improving liquidity metrics, could lead us to revise the outlook to positive or raise the ratings. Downside scenario We could revise the outlook to negative or lower the ratings in the next two years if a resumption of weakening economic conditions or poor fiscal policy choices result in the derailment of the province's fiscal recovery path reflected in the continuation of after-capital deficits greater than 10% of total revenues and steady material increases in the tax-supported debt burden. Rationale Efforts to combat the spread of the coronavirus, such as stay-at-home orders and closures, took their toll on the provincial economy and the government's revenues in fiscal 2020-2021 (year ended March 31). After-capital deficits deepened and tax-supported debt burden rose to levels incompatible with those of 'AAA' rated peers. We now consider that operating and after-capital deficits for fiscal 2021-2022 will be significantly larger than expected at the outset of the pandemic, which will likely lengthen the time it takes for the province to return to fiscal balance. However, B.C.'s economic and fiscal prospects are brightening as the pandemic wanes. S&P Global Economics' current baseline assumption is that Canada's real GDP will rebound 6.1% in 2021 following a 5.3% contraction in 2020. The economy should reach pre-pandemic levels by the end of this year when the national unemployment rate should stand at 7.6% (for more information see "Economic Outlook Canada Q3 2021: Growth Setback In The Spring Will Give Way To Summer Boom," published June 25, 2021, on RatingsDirect). B.C.'s 5.3% contraction in 2020 was in line with that of the country and we expect the province's real GDP rebound in 2021 and 2022 will be broadly the same. Fiscal results for 2020-2021 will be weaker than we expected at the outset of the pandemic. We believe that the operating and after-capital deficits should be close to 12% and 21% of operating and total revenues, respectively. The widening of deficits is explained due to larger-than-expected pandemic-related health care spending. However, thanks to considerable direct and indirect support from the federal government to the province, revenues were less affected than previously anticipated. At this point, we are not expecting significant improvement in operating and after-capital results. For fiscal 2021-2022, we expect operating and after-capital deficits of 10% and 22% of operating and total revenues, respectively. Taxpayer-supported debt should stand at about C$87 billion at fiscal 2020-2021 year-end and represent about 146% of operating revenues, rising to about C$125 billion or 195% by fiscal 2023-2024.. With a robust rebound in 2021 and 2022, B.C.'s real GDP growth will echo that of Canada. We believe the provincial economy will rebound in 2021 as vaccination rates climb and the pandemic wanes. Based on the province's projections, B.C.'s economy will expand by 4.4% on a real basis, rebounding from a 5.3% decline in 2020. The economy's trajectory will broadly follow that of the country. Despite the downturn, we expect the province will retain its considerable www.spglobal.com/ratingsdirect July 7, 2021 2
Research Update: Province of British Columbia Rating Lowered To 'AA+' From 'AAA' On Pandemic’s Blow To Fiscal Results And Debt economic strengths. B.C.'s GDP per capita will remain in line with the national average of about $49,900 for 2021. The provincial economy should also remain well diversified. Large resource endowments, high-ranking livability, and proximity to Asian markets should continue to underpin B.C.'s affluent tax base. Key sectors include forestry, mining, and natural gas; financial and real estate services; construction and manufacturing; and a large public sector. The liquefied natural gas (LNG) sector continues to develop despite some pandemic-related stoppages; work continued on the C$40 billion LNG Canada project, which will bring B.C.'s natural gas to Asian markets. We also expect B.C.'s financial management practices will remain very strong. The government customarily incorporates robust contingencies in its fiscal plans. Although the contingencies that were embedded in the 2020 budget did not prove to be sufficient, this was the case for all provinces despite considerable unanticipated direct support from the federal government. The civil service remains experienced and qualified to effectively deliver fiscal policies. We believe that the province has well-defined financial policies and well-documented financial plans that provide visibility. We also believe that management of debt and liquidity is prudent. As is the case with all other provinces, the ratings on B.C. benefit from the very predictable and well-balanced institutional framework for Canadian provinces. The Canadian constitution is the cornerstone of federal-provincial intergovernmental arrangements, which we view as mature and stable. The federal government provides revenue support through a number of agreements and transfer arrangements, including the Canada Health Transfer and Canada Social Transfer payments. In our opinion, the federal government's considerable extraordinary support for individuals, businesses, and lower levels of government throughout the pandemic demonstrates the strength of the Canadian system. Thanks to the pandemic's negative effect on provincial own-source revenues and unanticipated direct support from the federal government, the share of total provincial revenues represented by federal government transfers soared to about 22% in fiscal 2020-2021 from 16% in the previous year. The pandemic eroded operating revenues and boosted operating expenditures, resulting in large operating and after-capital deficits for fiscal years 2020-2021 and 2021-2022. We expect little improvement in operating and after-capital results in the next year. For fiscal 2021-2022, we expect operating and after-capital deficits of 10% and 22% of operating and total revenues, which are larger than we had anticipated in 2020. With the resumption of economic growth and tighter expenditure control, fiscal results could improve significantly in the next two years. For fiscal 2019-2020 to fiscal 2023-2024, we estimate that operating and after-capital deficits could average 5% and 15% of operating and total revenues, respectively. Also, the province could reach near-operating balance and materially lower its after-capital deficit by fiscal 2023-2024, which bolsters our assessment of B.C.'s budgetary performances. Our view of the province's strong fiscal flexibility still bolsters our budgetary performance assessment, as we believe the government will take the steps necessary to ensure its fiscal sustainability. We expect the province's debt will rise substantially during the pandemic and recovery years. Tax-supported debt (including debt issued in the province's name and on-lent to BC Hydro) is likely to represent C$102 billion or 172% of operating revenues, approximately in fiscal 2021-2022, rising to about C$125 billion or 195% by fiscal 2023-2024. Taxpayer-supported debt was about C$72 billion or 123% of operating revenues at the end of fiscal 2019-2020. The province's own-purpose debt burden, which excludes debt on-lent to BC Hydro, has surpassed our 120% threshold. We expect the interest burden will remain moderate, at about 5% of operating revenue for fiscal 2020-2021 to fiscal 2022-2023. Contingent liabilities are manageable, in our www.spglobal.com/ratingsdirect July 7, 2021 3
Research Update: Province of British Columbia Rating Lowered To 'AA+' From 'AAA' On Pandemic’s Blow To Fiscal Results And Debt view. Owing to large after-capital deficits, the debt service coverage ratio (DSCR) has weakened. We expect the province's free cash will represent about 24% of the next 12 months' debt service. It is our view that, as after-capital deficits decline, the DSCR will strengthen, which bolsters our assessment of the province's liquidity. B.C. also benefits from strong access to external liquidity. In addition to issuing in the domestic market, the province maintains liquid benchmark issues in Canada, and has active borrowing programs in the U.S. and Europe, providing important diversification. B.C. uses swaps to mitigate currency risk on its foreign currency bond issues and targets minimal exposure to floating-rate risk. Environmental, social, and governance (ESG) factors relevant to the rating action: - Health and Safety Key Statistics Table 1 Province of British Columbia--Selected Indicators Fiscal year end --Fiscal year end March 31-- (Mil. C$) 2018 2019 2020bc 2021bc 2022bc 2023bc Operating revenues 57,446 57,686 59,215 59,149 63,400 65,144 Operating expenditures 53,226 56,513 66,529 64,994 65,158 66,118 Operating balance 4,220 1,173 (7,314) (5,845) (1,758) (974) Operating balance (% of operating 7.3 2.0 (12.4) (9.9) (2.8) (1.5) revenues) Capital revenues 118 119 127 140 149 159 Capital expenditures 4,379 4,719 5,460 7,305 7,753 7,589 Balance after capital accounts (41) (3,427) (12,647) (13,010) (9,362) (8,404) Balance after capital accounts (% of total (0.1) (5.9) (21.3) (21.9) (14.7) (12.9) revenues) Debt repaid 6,133 7,290 3,108 4,243 4,447 4,156 Gross borrowings 9,873 12,984 18,433 19,637 16,276 13,461 Balance after borrowings 3,699 2,267 2,678 2,384 2,467 901 Direct debt (outstanding at year-end) 62,939 69,062 84,042 99,135 112,556 123,710 Direct debt (% of operating revenues) 109.6 119.7 141.9 167.6 177.5 189.9 Tax-supported debt (outstanding at 65,665 71,751 86,702 101,857 115,185 126,288 year-end) Tax-supported debt (% of consolidated 114.3 124.4 146.4 172.2 181.7 193.9 operating revenues) Interest (% of operating revenues) 4.7 4.7 4.6 4.7 4.6 4.8 Local GDP per capita (single units) 59,103 60,707 57,365 60,664 63,134 64,767 www.spglobal.com/ratingsdirect July 7, 2021 4
Research Update: Province of British Columbia Rating Lowered To 'AA+' From 'AAA' On Pandemic’s Blow To Fiscal Results And Debt Table 1 Province of British Columbia--Selected Indicators (cont.) Fiscal year end --Fiscal year end March 31-- (Mil. C$) 2018 2019 2020bc 2021bc 2022bc 2023bc National GDP per capita (single units) 60,196 61,466 57,994 63,315 65,056 67,332 The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer. bc--Base case reflects S&P Global Ratings' expectations of the most likely scenario. N/A--Not applicable. N.A.--Not available. N.M.--Not meaningful. Fiscal year is budget year. Ratings Score Snapshot Table 2 Province of British Columbia--Ratings Score Snapshot Key rating factors Scores Institutional framework 2 Economy 1 Financial management 1 Budgetary performance 3 Liquidity 2 Debt burden 4 Stand-alone credit profile aa+ Issuer credit rating AA+ S&P Global Ratings bases its ratings on non-U.S. local and regional governments (LRGs) on the six main rating factors in this table. In the "Methodology For Rating Local And Regional Governments Outside Of The U.S.," published on July 15, 2019, we explain the steps we follow to derive the global scale foreign currency rating on each LRG. The institutional framework is assessed on a six-point scale: 1 is the strongest and 6 the weakest score. Our assessments of economy, financial management, budgetary performance, liquidity, and debt burden are on a five-point scale, with 1 being the strongest score and 5 the weakest. Key Sovereign Statistics - Sovereign Risk Indicators, April 12, 2021. Interactive version available at http://www/spratings.com/sri Related Criteria - Criteria | Governments | International Public Finance: Methodology For Rating Local And Regional Governments Outside Of The U.S., July 15, 2019 - General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 - General Criteria: Guarantee Criteria, Oct. 21, 2016 - General Criteria: Principles Of Credit Ratings, Feb. 16, 2011 www.spglobal.com/ratingsdirect July 7, 2021 5
Research Update: Province of British Columbia Rating Lowered To 'AA+' From 'AAA' On Pandemic’s Blow To Fiscal Results And Debt
Related Research
- Economic Outlook Canada Q3 2021: Growth Setback In The Spring Will Give Way To Summer
Boom, June 25, 2021
- S&P Global Ratings Definitions, Jan. 5, 2021
- Public Finance System: Canadian Provinces, May 12, 2020
- Guidance: Methodology for Rating Local and Regional Governments Outside of the U.S., July 15,
2019
- Institutional Framework Assessments For International Local And Regional Governments, July
4, 2019
- Guidance: Sovereign Rating Methodology, Jan. 22, 2019
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Ratings List
Downgraded
To From
British Columbia (Province of)
Senior Unsecured AA+ AAA
British Columbia Hydro & Power Auth
Senior Unsecured AA+ AAA
Downgraded; Outlook Action; Ratings Affirmed
To From
British Columbia (Province of)
Issuer Credit Rating AA+/Stable/A-1+ AAA/Negative/A-1+
www.spglobal.com/ratingsdirect July 7, 2021 6Research Update: Province of British Columbia Rating Lowered To 'AA+' From 'AAA' On Pandemic’s Blow To Fiscal Results And Debt
Ratings Affirmed
British Columbia (Province of)
Commercial Paper A-1(HIGH)
Commercial Paper A-1+
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www.spglobal.com/ratingsdirect July 7, 2021 7Research Update: Province of British Columbia Rating Lowered To 'AA+' From 'AAA' On Pandemic’s Blow To Fiscal Results And Debt
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