Bond rating agency downgrades N.L. following budget

A well-known bond rating agency has downgraded the Issuer Rating and Long-Term Debt rating of Newfoundland and Labrador from "A" to "A (low)" and changed the trend on the ratings to "stable."

"Newfoundland's 201617 budget, released on April 14, 2016, confirms that fiscal erosion is significant." says a release from DBRSLimited.

Two other bond rating agencies, Standard & Poor'sand Moody's, have maintained the province'sratings following the budget.

Confirms that fiscal erosion is significant.- DBRS

The budget is based on a Brent oil price assumption of USD 40/barrel in 201617 rising to USD 52/bbl in 201718 and USD 60/bbl in 201819.

"This points to a material deterioration in the economic and fiscal outlook that is expected to push debt significantly higher. Debt is estimated to have reached about 43% of GDP (GrossDomestic Product)in 201516 and could potentially exceed 60% of GDP as early as 201819, a level not seen since 2003," says DBRS.

In January,bond rating agencyDBRSLimitedplaced the province's long-term ratings on a "negative" trend.

"Based on the expectation that the rapid decline in oil prices would contribute to a material erosion in fiscal performance and significant accumulation of debt," says a release from the agency.

So, why did the agency change the trends on the ratingsfrom negative to stable?

"The trends on the ratings have been revised to stable because, in DBRS's view, the government is committed to taking credible action as reflected by the substantive and difficult decisions announced in the current budget," said DBRS.

The bond-rating agency noted that the province has set a timeline to return to balance in six years and is taking some steps towards doing that in the new budget. DBRSexpects bigger changes are coming.

'More substantive proposals for restructuring programs and reducing spending are still being developed."- DBRS Limited

"The more substantive proposals for restructuring programs and reducing spending are still being developed and will not be presented until the fall.," says DBRS'srelease.

"Risks remain tilted to the downside, as the outlook for the economy remains weak and the plan to reach balance is incomplete.DBRSwill continue to monitor the Province's efforts to restore fiscal sustainability."

The rating agency is not painting a rosy picture.

"Asmajor investment projects near completion (e.g., Hebron and Muskrat Falls), the economic outlook is only expected to deteriorate further. The province expects a prolonged period of adjustment characterized by years of economic contraction, declines in population and employment, and for unemployment to rise to nearly 20%."

What do rating agencies do?

Rating agencies giveinvestors information on the ability of corporations,countries, or provinces to pay back debt. Theirgoal isto help investors assess the riskof lending to a specific borrower. They help answer questions such a how likely they are to make interest payments on timeor how likely are theyto default.

What impact canbeing downgraded have ?

Being downgraded can affect a corporation, country or province'sability to borrow money on the markets. Investors see a downgraded entityas a riskier bet and can demand higher returns for loans. A downgraded province can pay more (higher interest) to borrow money.