The downgrade this week in Alberta’s credit rating reflects the province’s long-term reliance on revenue from resources rather than the recent change in government, experts say.
And while analysts have been generally positive about the United Conservative Party government’s plan to claw back spending, the plan carries significant risk and will only leave the province’s debt situation in slightly better shape than what the previous NDP government had planned.
Moody’s Investors Service changed the province’s rating this week to Aa2, from Aa1, citing continued weakness in the provincial economy and its reliance on non-renewable resources. New York-based Moody’s also upgraded the provincial outlook to “stable,” from “negative,” which essentially means the agency does not foresee another downgrade in the near future.
The UCP government was quick to blame the New Democrats for the downgrade, pointing to the increase in provincial debt over the NDP’s four years in power.
Adam Hardi, Moody’s lead analyst for Alberta, said the rating was driven in large part by the provincial government’s reliance on resource revenue and the reality that oil prices have not recovered as much as expected, as progress lagged on several new pipelines.
“All of that together would indicate that there’s a more structural issue here, a structural problem, and that was one of the key components of the rating consideration,” Mr. Hardi said in an interview.
“Those are driven by macroeconomic factors, to a large degree, that [are] beyond the control of any provincial government.”
Mr. Hardi said the current government’s focus on cutting spending by 2.8 per cent in coming years and reducing the deficit is positive. However, he said that is offset by the plan’s significant risk and uncertainty, especially as the province also cuts revenue through tax cuts at the same time.
He also said that Aa2 is still the agency’s third-highest rating on a 21-point scale.
Moody’s is the second major agency to weigh in on the province’s credit rating since the spring election. S&P Global maintained its long-term debt rating for Alberta at A+.
Fitch Ratings, which maintained Alberta’s rating of AA in April, plans to issue an update early next year, although Fitch analyst Marcy Block said there hasn’t been a significant change in the province’s overall trajectory.
DBRS, which before the election kept Alberta’s credit rating at AA, plans to update its rating before Christmas, said Travis Shaw, the agency’s vice-president of public finance.
Mr. Shaw echoed the concern about resource revenue and said the UCP government’s debt plan doesn’t represent a significant change in direction, projecting a balanced budget only a year earlier than the NDP.
“It looks fairly similar to what we have seen before,” he said, referring to the recent budget. “The revenue side of the equation is still highly volatile, with a good chunk of it being beyond their control."
He said the agency will be watching whether the government sticks to its budget plan and whether it is able to change course if there are unexpected changes to the economy.
Trevor Tombe, an economist at the University of Calgary, said reports from rating agencies can be a good reflection of how investors view the province, but they don’t have much of an impact on borrowing rates.
He said the Moody’s report underscores Alberta’s long-standing “bad habit” of surviving off resource royalties.
“Report after report after report – for many years – highlights the exposure of the Alberta government to commodity prices, and this is a choice that we make a province, that we keep making,” he said.
“We’re still heavily dependent on ... resources, and that risk means that there’s a lot of uncertainty around future debt projections for the province.”
James Keller