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Announcement:

Moody's Still Sees Risks In Lengthy Recovery Plan In Newfoundland and Labrador's 2017 Budget

Global Credit Research - 07 Apr 2017

Toronto, April 07, 2017 -- Moody's Investors Service notes that although the recently released 2017/18 Budget for the Province of Newfoundland and Labrador (Aa3, negative) presents a better than projected result for 2016/17, the multi-year plan to return to balanced budgets continues largely unchanged from last year's budget.

The province forecasts that the 2016/17 deficit, originally budgeted at CAD1.8 billion (27.0% of revenue) is now estimated to have measured CAD1.1 billion (14.8% of revenue). While this is a positive development, the province's plan to return to balance is largely unchanged, with deficits gradually declining before a return to surplus is achieved in 2022/23. The deficit for 2017/18 is forecasted at CAD778 million (10.6% of revenue).

"While we do see the lower than budgeted deficit for 2016/17 as a credit positive, we note that overall the province continues to face a lengthy return to balanced budgets, the path of which remains relatively unchanged from last year", noted Michael Yake, Moody's Vice President. "As such, the plan continues to face material risks and the province's debt will continue to increase over the medium term, although the accumulation is expected to be slightly lower than previously anticipated".

After introducing a number of revenue measures last year, the 2017/18 Budget introduces no new taxes or fees, including instead a planned decrease to the Temporary Gas Tax which was introduced last year. Nonetheless, taxation revenues are expected to continue to benefit from previously introduced measures, rising 5.6%, helping to offset lower offshore oil royalties which are expected to fall due to a 7.8% decline in production. These dynamics, along with the fact that much of the better than expected performance in 2016/17 is attributable to higher than expected offshore oil royalties, revenues are expected to remain relatively flat between 2016/17 and 2017/18.

Given the flat revenue profile for 2017/18, the forecasted improvement in fiscal position is largely dependent on increased expenditure control. The province continues to seek cost reduction efforts, building on initiatives introduced last year. Expenses in 2017/18 are expected to fall 3.4% relative to updated 2016/17 figures, with the largest departments (health & community services, education and early childhood development and advanced education, skills and labour) declining a combined 1.1%.

Moody's also notes that the long-term plan to return to balance in 2022/23 continues to rely on the ambitious target of achieving a decline in expenditures over the period 2018/19 -- 2022/23.

"Given the level of importance of expenditure control in achieving the budget outcome, we will monitor the province's cost reduction efforts in 2017/18 to ensure that they are sustainable across the budget horizon", added Mr. Yake.

Following a CAD2.9 billion borrowing program in 2016/17, the province forecasts requiring only CAD400 million in new borrowing in 2017/18. While this is lower than the planned CAD2.4 billion as presented in the previous year's budget, and therefore favourably impacts the short-term dynamics compared to previous Moody's estimates, Moody's continues to assume that total borrowing over the budget horizon will be only slightly below the CAD8.2 billion limit the province had targeted in last year's budget. The level of projected net debt as a share of revenue is expected to remain within the 220-225% range across the rating horizon, roughly the same as previously forecasted by Moody's.

As part of its normal monitoring practice, Moody's will evaluate the 2017/18 budget's assumptions and its potential for upside and downside risks within the context of impacts on fiscal position, debt burden and interest expense.

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
(416) 214-1635

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

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

No Related Data.
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