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Announcement:

Moody's Calls New Brunswick's Increased 2018 Budget Deficit Credit Negative

31 Jan 2018

Toronto, January 31, 2018 -- Moody's Investors Service notes that the Province of New Brunswick (Aa2 stable) forecasts larger deficits in fiscal 2018/19 and 2019/20 and will extend the date for the planned return to balanced budgets. Moody's says that these developments are credit negative for the province.

Despite forecasting a stronger fiscal outcome for 2017/18, now projected to finish with a deficit of CAD115.2 million (1.2% of revenue) which is an improvement over the original budgeted deficit of CAD191.9 million (2.1% of revenue), the province's 2018 Budget plans for an increase to its deficit for 2018/19, which is expected to measure CAD188.7 million (2.0% of revenue) followed by a deficit of CAD124 million (1.3% of revenue) in 2019/20.

While these levels are relatively small, the stalled progression on deficit reduction is credit negative for the province which has not posted a balanced budget since 2007/08 and is not planning a balanced budget until 2021/22, resulting in one of the longest period of continued deficits among Canadian provinces following the 2008/09 financial crisis.

"The 2018/19 budget deficit is forecasted to be over 60% higher than the 2017/18 deficit and represents a slippage away from the province's prior plans," noted Michael Yake, Moody's Vice President. "Furthermore, this increased deficit will lead to a delay in the return to balanced budgets, which is now forecast for 2021/22, one year later than previously expected. Although small, the reversal compared to previous plans and inability of the province to end debt financing for operations is a credit negative."

Moody's also notes that the increase in deficit comes as the province is enjoying its strongest stretch of economic growth since the financial crisis of 2008/09, albeit still relatively modest. The province forecasts real GDP growth will be 1.1% in 2018, down from the forecasted growth of 1.3% in 2017, but still representing the fourth consecutive year where real GDP growth exceeded 1%.

New Brunswick notes its economic forecast faces some downward risks in the near term primarily stemming from the ongoing uncertainty of NAFTA discussions. New Brunswick's economy is heavily dependent on exports (including mining, wood products and agricultural products), with approximately 90% of exports destined for the United States. Continued uncertainty regarding NAFTA discussions may lead to slower export growth and delays in investment.

Despite these risks, the economic growth is a driver in the revenue projections for the province. With no new revenue measures introduced, Budget 2018 forecasts revenue growth of 1.8% over updated 2017/18 forecasts, which themselves were slightly higher than Budget 2017 forecasts.

The increase in deficits can be attributed to an increase in spending. The province forecasts spending to rise 2.5% over updated 2017/18 forecasts. Moody's also notes that, similar to the province's previous budgets, the goal of achieving balanced budgets relies in large part on one year of tight expenditure control (0.7% growth in 2021/22) which may not allow for sustainable results in future years if pressure is simply delayed.

"While the planned spending increases over the budget horizon are manageable, the goal of achieving sustainable balanced budgets will continue to be viewed as a challenge for the province, given past performance", added Mr. Yake.

While future deficits will be larger than previously expected, the province exceeded past budget targets which resulted in lower than planned financing. These past results will offset the higher financing now needed for 2018/19 and 2019/20. Including financing required for the previously released 2018/19 Capital Budget, Moody's forecasts that the province's net direct and indirect debt will fluctuate within a band of 150-160% of revenue, a relatively high level but which is in line with previous Moody's projections.

As part of its normal monitoring process, Moody's will carefully evaluate the 2018/19 budget's assumptions and its potential for upside and downside risks and likely impacts on the province's debt burden, fiscal outcome and liquidity profile.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Michael Yake
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

David Rubinoff
MD - Sub Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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