Alberta budget 'no longer valid,' says Toronto-based credit rating agency in downgrading province

The global credit rating agency DBRS Morningstar says Alberta hasn't done enough to respond to economic pressures from the COVID-19 outbreak and the subsequent plunging price of oil.

The Toronto-based firm said Thursday that it had decreased Alberta's credit rating from AA to AA low, citing the provincial government's lack of a "full fiscal policy response" to incoming pressure.

Travis Shaw, senior vice-president of public finance at DBRS, said the Alberta government's recent budget now seems "long past."

"Unfortunately, a lot of the economic assumptions and pricing assumptions that this plan was based on in this environment are no longer valid," he said. "That's not a criticism of government. That's just a recognition of what's transpired in the weeks since."

Alberta legislators swiftly approved the 2020 budget Tuesday night, citing pressures from the COVID-19 pandemic as the reason why the $57-billion budget needed to be passed immediately.

Shaw said DBRS previously had Alberta rated at AA on a negative trend in light of the fact that the province was continuing to face deficits and rising debts.

In light of the dramatic fall in oil prices, coupled with the coronavirus outbreak and the price war between Russia and Saudi Arabia, Shaw said DBRS felt compelled to respond to the province's plan for the future.

In line with Ontario and Quebec

The new rating puts Alberta in line with provinces like Ontario and Quebec.

While both those provinces have a much larger debt burden, Shaw said, they also have larger and more diversified economies that are not exposed to the oil and gas sector to the extent Alberta is.

"Essentially what that means is Alberta has a somewhat higher credit risk than it did previously, and that's one of the many factors that contributes to the province's borrowing cost and the amount they will have to pay bondholders to finance their debt," Shaw said.

Shaw said the situation is still fluid and clarity isn't expected in the immediate future — but next steps forward will be crucial.

"We're waiting to see with Alberta, as well as with other provinces, what is their full revised fiscal plan in this new environment," he said. "New oil prices, new economic growth assumptions and a still yet unknown cost of trying to contain this coronavirus."

Alberta's credit rating has been downgraded twice by DBRS Morningstar over the last few years.

'This fight could last for years'

DBRS also placed ratings for Saskatchewan and Newfoundland and Labrador under review with negative implications.

Economist Trevor Tombe said the downgrades were not unexpected, given how far oil prices have fallen.

"Alberta, Saskatchewan and Newfoundland are put in a really difficult position because of the importance of oil revenues for those governments, and for Newfoundland in particular," he said. "They're looking at a particularly high deficit in this coming year, coupled with their already high levels of debt."

Alberta can handle this kind of shock more easily than a province like Newfoundland, Tombe said, but it's not at all clear that this is a short-term challenge. 

"Certainly, this health crisis is hopefully short-term, but some of the oil price weakness that we're seeing is the result of OPEC breaking down, whether or not Russia and Saudi Arabia come to terms around how that organization will work in the future," Tombe said. "This fight could last for years. We don't know." 

Credit rating agencies want to know if the government will be able to repay what it says it will, Tombe said.

"Are the bonds that a government sells worth the paper they're written on? I think, in a time like this, it's natural for investors to consider whether or not lending money to Alberta, Saskatchewan and Newfoundland is a little bit more risky than it was before," he said. "And I think that's completely fair."