Experts say reliance on resource revenue is the reason for Alberta credit downgrade – The Globe and Mail

The downgrade this week in Albertas credit rating reflects the provinces 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 governments plan to claw back spending, the plan carries significant risk and will only leave the provinces debt situation in slightly better shape than what the previous NDP government had planned.

Moodys Investors Service changed the provinces rating this week to Aa2, from Aa1, citing continued weakness in the provincial economy and its reliance on non-renewable resources. New York-based Moodys also upgraded the provincial outlook to stable, from negative, which essentially means the agency does not foresee another downgrade in the near future.

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The UCP government was quick to blame the New Democrats for the downgrade, pointing to the increase in provincial debt over the NDPs four years in power.

Adam Hardi, Moodys lead analyst for Alberta, said the rating was driven in large part by the provincial governments 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 theres 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 governments 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 plans 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 agencys third-highest rating on a 21-point scale.

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Moodys is the second major agency to weigh in on the provinces credit rating since the spring election. S&P Global maintained its long-term debt rating for Alberta at A+.

Fitch Ratings, which maintained Albertas rating of AA in April, plans to issue an update early next year, although Fitch analyst Marcy Block said there hasnt been a significant change in the provinces overall trajectory.

DBRS, which before the election kept Albertas credit rating at AA, plans to update its rating before Christmas, said Travis Shaw, the agencys vice-president of public finance.

Mr. Shaw echoed the concern about resource revenue and said the UCP governments debt plan doesnt 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.

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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 dont have much of an impact on borrowing rates.

He said the Moodys report underscores Albertas 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.

Were still heavily dependent on ... resources, and that risk means that theres a lot of uncertainty around future debt projections for the province.

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Experts say reliance on resource revenue is the reason for Alberta credit downgrade - The Globe and Mail

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