EDMONTON — An internationally recognized credit rating agency is sounding alarm bells on Alberta’s debt situation.
The Toronto-based agency DBRS, in a report issued Thursday, says with oil prices so low and the government’s borrowing plans so high, Alberta will exceed its own self-imposed legislated debt limits this fiscal year.
The agency confirmed Alberta’s top-drawer triple-A credit rating, but said the future is grim.
“The negative trend reflects DBRS’s expectation that the continued weakness in oil prices will contribute to a material erosion in the province’s fiscal performance and accumulation of debt,” said the DBRS report.
“DBRS believes that the fiscal response is unlikely to be adequate to maintain credit metrics consistent with the AAA rating, in particular maintaining a DBRS-adjusted debt burden below 15 per cent of GDP,” it added.
“Debt is now expected to exceed 15 per cent of GDP as early as (fiscal) 2016-17.”
Alberta, under a law passed last year by Premier Rachel Notley’s NDP government, cannot borrow so much money that the total exceeds 15 per cent of its gross domestic product.
Finance Minister Joe Ceci has said that 15 per cent limit is critical to ensure that future generations of Albertans are not saddled with crippling debt payments.
But he has noted other provinces take on as much as 30 per cent.
Notley’s government, in its first budget last October, ramped up infrastructure spending to $34 billion over the next five years despite the low price of oil.
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When that is coupled with interest charges and borrowing to pay for day-do-day operations, Alberta’s debt is expected to reach almost $48 billion by the end of the decade.
However those debt projections are based on benchmark oil averaging US$50 a barrel this year and US$61 a barrel in the upcoming fiscal year that starts April 1.
That benchmark, West Texas Intermediate, started the year under US$40 a barrel and is now under US$30 a barrel.
Each $1 drop in the average price of oil over the course of a year siphons $170 million out of the province’s bank account — although some of those losses are offset by a low Canadian dollar.
DBRS also downgraded the fiscal outlook for the province from stable to negative. Last week, the credit rater Moody’s Investors Service issued the same downgrade.
Last month, the agency Standard and Poor’s dropped its triple-A rating for Alberta down to double-A plus.
At that time, Standard and Poors rated Alberta’s financial management “very strong” but it’s budgeting performance “weak.”
A drop in rating reflects a loss of confidence in debt management and leads to higher borrowing costs.
This is the second time in less than two months that DBRS has weighed in on Alberta’s economy.
In its last report, issued on Nov. 30, 2015, DBRS affirmed Alberta’s triple-A rating and said the NDP budget plan was “manageable,” but warned that continued deterioration in oil prices “would be cause for concern.”
Ceci, in a statement, said the province is sticking with the long-term plan introduced in the October budget.
“Our government will work to find efficiencies, but we will not make reckless cuts that would simply make a bad situation worse,” said Ceci.
The NDP plans to continue to modestly hike spending in key areas like health and education in the upcoming years. Hiring restrictions are in place, but Ceci says he won’t engage in widespread cuts to front-line services.
The infrastructure spending is to help spur economic growth and create jobs while taking advantage of low interest rates to catch up on Alberta’s infrastructure deficit.
Notley’s team has also launched numerous programs and plans to diversify the economy.