Fitch Affirms Province of British Columbia, Canada's Rating at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the Province of British Columbia's Foreign and Local currency long-term Issuer Default Rating (IDR) at 'AAA' and short-term IDR at 'F1+'. Fitch also affirms the province's senior unsecured long- and short-term debt at 'AAA' and 'F1+', respectively. The Rating Outlook for the Long-term IDRs and long-term rating on the senior unsecured debt is Stable.

SECURITY

Senior, unsecured obligations of the province.

KEY RATING DRIVERS

COMMITMENT TO FISCAL BALANCE: British Columbia has a demonstrated commitment to balanced fiscal operations, as evidenced by its proposed second consecutive balanced budget for fiscal 2015. Although the province realized deficits during the last downturn, disciplined financial management led to a forecasted modest surplus for the recently ended fiscal year and for the current fiscal year. The province's three-year fiscal plan projects slowly increasing surpluses through fiscal 2017, inclusive of various contingencies.

BROAD, SLOWLY GROWING ECONOMY: The province's diverse economy continues a somewhat halting recovery from the recession. Employment declined modestly in 2013, and GDP growth is projected at its lowest rate since a recessionary decline in 2009. Ministry of Finance projections indicate modest acceleration over the three-year financial plan period. Prudently, the provincial budget includes forecast allowances to offset potential revenue shortfalls should economic growth lag projections.

MANAGEABLE DEBT BURDEN: The province's debt burden, which was substantially reduced in the last decade, remains manageable despite increasing since the downturn due to borrowing to cover operating deficits and provide for economic stimulus. The province expects taxpayer-supported debt as a percent of GDP peaked in fiscal 2014 below the prior peak, and decline slowly thereafter.

RATING SENSITIVITIES

FUNDAMENTAL CREDIT CHARACTERISTICS: The rating is sensitive to shifts in the province's commitment to maintaining balanced fiscal operations over the fiscal plan outlook period and continued moderation of debt levels.

CREDIT PROFILE

British Columbia's 'AAA' rating primarily reflects conservative financial management practices resulting in stable fiscal performance and a well-managed liability profile. Provincial economic performance has been generally positive since the recession, though a 2013 slowdown suggests a sluggish recovery.

FISCAL DISCIPLINE YIELDS MODEST SURPLUSES

Fitch considers British Columbia's financial planning and controls to be strong, and directly supporting the return to fiscal balance following recession-driven operating deficits. The province is forecasting its first balanced budget in five years in fiscal 2014 (ended March 31). During the downturn, British Columbia closed fiscal 2010 with a deficit of C$1.89 billion after five years of surplus operations. The province embarked on a plan to restore fiscal balance through a combination of expenditure controls and revenue measures. Most prominently, the province enacted multiple mandates guiding contract negotiations with unions to hold down labor costs, and also held annual healthcare expense growth at or below 6% beginning in fiscal 2010. Revenue measures included a temporary two year income tax hike on high income earners for 2014 and 2015. In February, the province anticipated ending fiscal 2014 with a small C$175 million surplus, representing just 0.4% of revenues.

In mid-February, British Columbia's Minister of Finance tabled a fiscal 2015 budget that continues the trend of fiscal discipline and modest surpluses with a projected C$184 million surplus (also 0.4% of revenues), and improvement anticipated over the three-year financial plan outlook period. By fiscal 2017, Finance Ministry projections indicate a C$451 million surplus, or 1% of revenues. The budget includes continuation of key expense measures including holding average annual growth in healthcare expenditures to 2.6% over the three-year financial plan, and an Economic Stability Mandate calling for a 5.5% general wage increase spread over five years, with the potential for additional raises tied to the province's economic performance. As of April 4, 2014 the province reported that nearly 72,000 of its 311,506 unionized public sector employees (or about 23%) had tentative or ratified agreements settled under the mandate.

Importantly, the budget continues British Columbia's practice of including built-in cushions in the form of expense contingencies and revenue forecast allowances. Total value of the contingencies at C$1.275 billion over the three-year financial plan are minor relative to the total budgets, covering 0.7%, 0.9%, and 1.2% of expenses in fiscal 2015, 2016, and 2017 respectively. But they do provide some cushion in the event of unanticipated expenses. Revenue forecast allowances are smaller relative to projected revenues at just 0.4%, 0.5%, and 0.7% of revenues for fiscal 2015, 2016, and 2017. As an additional protection against revenue volatility, the Ministry of Finance built its budget on economic growth slightly below the views from its panel of independent economists, the Economic Forecast Council. Budgeted real GDP growth is 0.3 percentage points (pp) lower than the council's outlook for calendar year 2014, 0.4 (pp) lower than the outlook for 2015, and 0.2 (pp) lower for 2016 and 2017.

BROAD ECONOMIC BASE RECOVERING

British Columbia's overall economic profile remains sound, though recent slowing of growth indicates the province still faces challenges. The province is a key component of Canada's overall economic profile with provincial GDP (C$208.961 billion in 2012) representing between 12% and 13% of national GDP. Distribution across sectors is very close to the national distribution, indicating a well-diversified economic base. While natural resources are critical for the province's vast interior, other sectors including financial activities and education and health services, which are based mainly in Vancouver, are significantly larger components of GDP. Leading up to the recession, British Columbia's growth rate had been far exceeding national trends and the downturn was somewhat less severe in the province than for the nation as a whole. But the province's recovery has been less robust with annual real GDP growth trailing national growth in 2010 and 2012. The Finance Ministry's forecast for 2013 of 1.4% would be British Columbia's lowest growth rate since 2008 when the recession was beginning to take hold. Employment (measured by the labour force survey) declined in 2013 by 0.2%, reversing the prior year's 1.7% gain. Non-farm payrolls growth actually accelerated in 2013 to 2.2% from 1.3% in 2012.

The outlook for 2014 and 2015 is somewhat brighter with the ministry projecting real GDP growth of 2% and 2.3% in the province, just ahead of its projections for Canadian GDP growth in 2014 and in line with the forecast for 2015. British Columbia's economic growth will depend partially on its international goods exports, which totaled C$33.49 billion in 2013. The United States remains the dominant trading partner (46.3%), though the share has declined as Asian markets, particularly China, have become more important. The U.S. share declined from nearly 70% in 2001 while China's share increased to 20% from just over 2% in 2001.

Given the province's slower pace of economic growth in 2013, Fitch will monitor British Columbia's economic performance over the near-term. The forecast allowances provide a small, but important, cushion in the event economic growth stalls. Fitch also anticipates the province would take quick budgetary action to respond to significant revenue weakness beyond the allowances.

WELL-MANAGED DEBT PROFILE

British Columbia's debt position remains manageable, with significant debt paydowns in the middle part of the last decade, and compares favorably to the other Canadian provinces. Borrowing and debt levels increased during the recession and initial recovery for deficit financing and economic stimulus purposes. The province expects taxpayer-supported debt levels as a percent of GDP to peak at 18.5% of GDP in fiscal 2014, which is one year earlier than the prior forecast peak of 18.5% in fiscal 2015. The tabled budget forecasts taxpayer-supported capital spending of $11 billion through fiscal 2017 and taxpayer-supported debt to GDP declining gradually to 17.8% in fiscal 2017. Given the province's track record in closely managing its debt burden, Fitch views these levels as attainable. As with surpluses garnered prior to the recession, British Columbia anticipates using any operating surpluses to pay down debt. Taxpayer-supported debt as a percent of taxpayer-supported revenue remains moderately high at 98.1% as projected for fiscal 2014. Over the three-year financial plan, the burden increases slightly before declining to 98.4% in fiscal 2017.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'International Local and Regional Governments Rating Criteria, Outside the United States' (Aug. 17, 2012).

Applicable Criteria and Related Research:

International Local and Regional Governments Rating Criteria (Outside the United States) - Effective Apr. 19, 2011 to Mar. 5, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=611485

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst:
Eric Kim, +1-212-908-0241
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Eric Kim, +1-212-908-0241
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Committee Chairperson:
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com