Manitoba's economic outlook may not be as bleak as premier says, according to credit rating agencies

Though Manitoba's economy, like others around the globe, has been hammered by the coronavirus pandemic, the picture may not be as desperate as the province's premier has made it out to be, according to two credit rating agencies.

When asked this week if lower-than-projected deficits would prompt a reversal of cuts to the civil service or free up money to help business owners, Premier Brian Pallister held firm to his belief that spending needs to be cut in light of the pandemic.

"Nobody's projecting that we're gonna be in anything but a desperate situation here," Pallister said during a Wednesday teleconference with journalists.

But S&P Global Ratings associate director Adam Gillespie sees Manitoba's situation differently.

On May 15, the New York-based credit rating agency revised Manitoba's credit outlook from positive, which means "may be improved," to stable, which means "not likely to change." The revised outlook did not change the province's A+ credit rating.

"I think it's almost as much of an upside as you could expect under the current situation. There are probably more downside risks at this moment across the country," Gillespie said in an interview. 

"I think the stable outlook is, in some ways, a good story for the province," said Gillespie.

The May 15 report says the province faces $3.5 billion in additional debt beyond what was anticipated in its fiscal 2021 budget — significantly lower than the government's $5-billion estimate at the start of the pandemic.

S&P characterizes the pandemic's effect on Manitoba's economy as primarily a hit to revenue. The bond rater forecasts a $2.5-billion revenue shortfall and a $1-billion spending increase this year due to COVID-19.

S&P's report notes COVID-19 prompted increased health spending on things like personal protective equipment, but it also resulted in decreased spending on elective surgeries and diagnostic tests. 

"There will be partial offsets as the province postpones some of the normal activities of its health-care facilities," reads the report, although there is no dollar figure attached to those savings.

How economically vulnerable is Manitoba?

The province painted a bleak economic picture in a May 4 press release announcing a 2.2 per cent cut to public sector workforce expenditures.

The announcement warned that bond rating agencies had reported Manitoba's high debt load puts the province "among the most vulnerable of all provinces to withstand economic shocks such as the global COVID-19 pandemic."

Gillespie says S&P doesn't rank economic vulnerability per se, but credit ratings themselves are a relative ranking of how bond rating agencies view provinces' credit worthiness.

Manitoba is middle of the pack as far as credit ratings go, according to Gillespie.

DBRS Morningstar — one of the other agencies that rates Manitoba's credit — gives a similar assessment.

"The credit rating for Manitoba is the middle of the pack among Canadian provinces," said Paul Le Bane, vice-president of public finance at DBRS Morningstar.

He says Manitoba is similar to Nova Scotia, but behind Ontario and Quebec. Prince Edward Island and Newfoundland and Labrador are near the bottom.

And while the province says Manitoba is vulnerable to "economic shocks" because of its debt, Le Bane says it is not a major factor.

"The debt itself isn't a problem at this point. Manitoba's debt rose quickly between the mid-2000s to though 2015, and since the [Progressive Conservative] government came in, debt ratios really stabilized," he said.

"Manitoba continues [borrow] in capital markets at very favourable rates," said Le Bane.

S&P places a higher importance on Manitoba's debt.

"The primary constraint on Manitoba's credit profile continues to be its debt burden, which remains the highest of any Canadian province," wrote S&P in its May update.

But that's because S&P, unlike all other bond raters, includes Manitoba Hydro debt in its calculation. 

"Manitoba's tax-supported debt could exceed $62 billion, or 330 per cent of operating revenues, by fiscal 2023," S&P's report says.

When Manitoba Hydro debt is removed, the percentage drops to about 200 per cent of operating revenues by the end of fiscal 2023.

But even though S&P lumps the Crown corporation's debt in with the province's debt, it treats it differently when assigning credit worthiness.

"It's a bit of a technicality," said GIllespie. Manitoba Hydro has demonstrated an ability and willingness to repay its obligations and it does not require direct, ongoing support from the government, he said.

"We do make a positive adjustment for that on lent [Manitoba Hydro] debt." 

How are we doing compared to other provinces?

The economic shutdown due to the pandemic has not been as severe in Manitoba as in Ontario and Quebec, said Le Bane, who noted Manitoba began reopening earlier and allowed construction to continue during the shutdown.

He said provinces more reliant on oil production like Alberta, Saskatchewan, and Newfoundland and Labrador were hit from both sides.

"They're dealing with two things: the economic shutdown from COVID and the oil price shock that came in March. So that's kind of a double whammy for them," said Le Bane.

"It is still too early to tell which Canadian provinces will ultimately experience the worst fallout from the pandemic," says S&P's May update, but "to date Manitoba has recorded proportionately fewer [COVID-19] cases than many other provinces."

S&P's preliminary estimates show Manitoba's operating deficit could reach approximately 11 per per cent of revenues in 2021 and steadily improve to an operating surplus of about one per cent in 2023.