NEW YORK--(BUSINESS WIRE)--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
BROAD, SLOWLY GROWING ECONOMY: British Columbia's diverse economy continues its pace of steady economic growth, ahead of the Canadian average. Employment growth picked up modestly in 2015 and the provincial government is forecasting modest GDP growth, albeit below pre-recession growth rates. Prudently, the government's budget includes expense contingencies and forecast allowances around cautious economic forecasts to ensure the provincial budget remains balanced.
COMMITMENT TO FISCAL BALANCE: British Columbia has maintained balanced budgets for three consecutive years and anticipates continued balance through its three-year fiscal plan for fiscals 2017 to 2019. The province estimates a C$377 million surplus for the recently ended fiscal year, and its three-year fiscal plan projects similar results through fiscal 2019.
MANAGEABLE DEBT BURDEN: The province's debt burden remains manageable and on a gradual downward slope reflecting the government's commitment to reducing debt ratios. The government projects the taxpayer-supported debt-to-GDP ratio declined in fiscal 2016, for a second consecutive year, and the three-year fiscal plan anticipates continued declines.
RATING SENSITIVITIES
FUNDAMENTAL CREDIT CHARACTERISTICS: British Columbia's ratings are 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, and is likely to exceed national performance in the near to medium term.
FISCAL DISCIPLINE YIELDS MODEST SURPLUSES
Fitch considers British Columbia's financial planning and controls to be strong and views them as key reasons for the timely return to fiscal balance following recession-driven operating deficits. The province estimates a third consecutive balanced budget in fiscal 2016 (year ended March 31).
During the downturn, British Columbia ended fiscal 2010 with a deficit of C$1.81 billion following five years of surplus operations. The province embarked on a multi-year 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. Overall, healthcare spending grew at 3.7% on a compound average annual basis between fiscal 2010 and 2015. Revenue measures included a temporary two year personal income tax (PIT) hike on high income earners for 2014 and 2015.
As of February 2016, the province anticipated ending fiscal 2016 with a C$377 million surplus, representing 0.8% of revenues. Last year's surplus was driven by non-recurring items including earnings from the Insurance Corporation of British Columbia (ICBC), a Crown corporation (self-supporting enterprise of the province). British Columbia prudently used last year's strong results to primarily build up its accumulated surplus and pay down direct operating debt.
In February, British Columbia's Minister of Finance tabled a fiscal 2017 budget that continues the trend of fiscal discipline with a projected C$264 million surplus (0.5% of revenues), and modest improvement anticipated over the three-year financial plan period. The budget also incorporates the expiration of the temporary PIT hike noted earlier. The province estimates the temporary hike generated C$210 million in fiscal 2016, or a modest 0.4% of forecast revenues. The fiscal 2017 budget projects a 1.9% decline in 2017 PIT revenues due mainly to the effects of prior-year adjustments in fiscal 2016 that do not fully carry forward and expiration of the temporary increase. PIT revenues increase a somewhat aggressive 4.8% and 4.2%, respectively, in the outer years of the province's fiscal plan. The government's revenue estimate includes technical factors it views as supportive of PIT estimates ahead of household income growth.
By fiscal 2019, Finance Ministry projections indicate a C$373 million surplus, equal to 0.7% of revenues. The budget includes continuation of key expense measures including holding average annual growth in healthcare expenditures to 2.8% over the three-year financial plan. Healthcare cost control is critical as this category consumes over 40% of provincial operating spending, and planned changes in federal transfers for healthcare will reduce federal contributions going forward. British Columbia brought year-over-year (yoy) health spending increases down to between 2% - 3% beginning in fiscal 2014. Specific cost-control measures included adjusting payment incentives to reduce the use of diagnostic tests and negotiating directly with providers for lower rates on those tests, and increasing use of generic drugs.
Another key factor in expense management is the Economic Stability Mandate governing new labor contracts. The mandate calls 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 2016, the province reported that about 98% of its unionized public sector employees had tentative or ratified agreements under the new mandate.
Importantly, the budget continues British Columbia's practice of including built-in cushions in the form of expense contingencies and forecast allowances. Total value of the contingencies, at C$1.25 billion over the three-year fiscal plan, is minor relative to the total budgets, covering just less than 1% each year. But they do provide some cushion in the event of unanticipated expenses or economic volatility.
Forecast allowances alone are also modest at C$1.05 billion over the three-year plan. 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 years 2016 and 2017, and 0.1pp lower than the outlook for 2018 and 2019. Contingencies, forecast allowances, and conservative economic growth assumptions are all long-standing aspects of the government's budgetary planning supporting Fitch's positive assessment of British Columbia's fiscal management.
BROAD ECONOMIC BASE GROWING SLOWLY
British Columbia's overall economic profile continues to provide a solid and diverse revenue base, but growth remains slow and below the pre-recession pace. The province is a key component of Canada's overall economic profile with provincial real GDP in 2014 comprising 12.8% of national GDP. Distribution across sectors is similar to the national distribution, indicating a well-diversified economic base. While natural resources are critical for portions of the province's vast interior, other sectors including financial activities and education and health services, which are based mainly in Vancouver and other urban areas, are significantly larger components of GDP.
Leading up to the recession, British Columbia's growth rate outpaced national trends and the downturn was somewhat less severe in the province than for the nation as a whole. While the province's recessionary recovery was somewhat less robust than the nation, recent performance has been stronger. In 2014, 3.2% real GDP growth exceeded the national gain of 2.5% and trailed only Alberta amongst the provinces. The Finance Ministry's forecast for 2016 of 2.4% growth in British Columbia is ahead of the ministry's national forecast of 1.4%. Fitch's March 2016 Global Economic Outlook also projects 1.4% national growth in 2016. BC's employment growth (measured by the Labour Force Survey) remains modest but the pace improved in 2015, increasing 1.2% versus 0.8% national growth.
British Columbia's outlook going forward is somewhat brighter than the rest of the nation given the province's lesser reliance on natural resources as an economic driver. Natural resources accounted for 8% of the province's 2014 real GDP versus 10% nationally.
Fitch views the economic risk associated with a potentially overvalued housing market as manageable for the province. In 2015, the province reports housing starts increased a robust 10.9% (per Canada Mortgage and Housing Corporation), total home sales rose 22% and home prices rose 12% (the latter two per the Canadian Real Estate Association). Fitch's assessment is that Vancouver has historically benefitted from a restricted land supply and high desirability given its favorable climate and coastal border. More recently, prices appear to have been supported by an influx of foreign buyers, particularly from Asia, who have viewed the Canadian housing market as a safe haven for investment, increasing the speculative value of these properties without altering the traditional market dynamics. The province will begin collecting additional data on residential purchases this year, which could provide more insight into trends underlying growth in housing prices. The province projects some moderation in the local housing market with declines in housing starts in 2016 and 2017.
Fitch views slowdowns in the national economy as British Columbia's most significant economic risk. The province appears well-positioned to withstand natural resource driven challenges at the national level given its economic diversity and close linkage with the neighboring U.S. economy. However, more severe Canadian weakness could slow British Columbia's economy beyond expectations. 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. Recent reductions in direct operating debt enhance the province's budgetary flexibility.
WELL-MANAGED DEBT PROFILE
While debt ratios are high, Fitch believes British Columbia's debt position is manageable 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, consistent with how Canadian provinces manage economic and revenue cyclicality. Positively, the province began reducing outstanding direct operating debt in fiscal 2015 (to C$9.3 billion) and the three-year fiscal plan anticipates reducing it steadily through fiscal 2019 to C$2.7 billion. Taxpayer-supported debt levels as a percent of GDP also declined in 2015 and British Columbia projects continued modest improvement through fiscal 2019.
The tabled Budget 2016 (covering fiscals 2017 - 2019) forecasts taxpayer-supported capital spending of just below C$12 billion through fiscal 2019 and taxpayer-supported debt to GDP declining gradually to 16.3% in fiscal 2019. Taxpayer-supported debt as a percent of taxpayer-supported revenue remains moderately high at 92.7% as projected for fiscal 2016. Over the three-year fiscal plan the burden remains essentially stable reaching 93% in fiscal 2019. The spending plan and ratios are relatively consistent with last year's tabled budget, reflecting the government's ongoing efforts to closely manage capital spending and debt issuance.
As with surpluses generated prior to the recession, British Columbia anticipates using operating surpluses to pay down debt. The province used a portion of the fiscal 2015 surplus to pay down approximately C$943 million of direct operating debt. Given the province's track record in closely managing its debt burden, Fitch views the budgeted debt ratios and reduction in operating debt as attainable.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Statistics Canada and the Canada Department of Finance.
Applicable Criteria
International Local and Regional Governments Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865254
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
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