Moody’s Investors Service has downgraded New Brunswick’s debt rating to Aa2, citing expected increases to the province’s debt burden due to fiscal policy measures.

“Over the next four years, the province’s fiscal policies are expected to produce substantial cash financing requirements,” Moody’s said, noting that the fiscal plan outlined in New Brunswick’s 2009-10 budget anticipates deficits of roughly $740 million in each of 2009-10 and 2010-11, representing approximately 10% of provincial revenues in each year.

After adjusting for non-cash items and differences between cash outlays required for capital expenditures and amortization, these deficits translate into cash financing requirements of $1.2 billion in 2009-10 and $1.4 billion in 2010-11 (16.2% and 18.8% of revenues respectively).

“Despite expense restraint built into the fiscal plan, weak revenue growth — owing to the ongoing economic downturn and compounded by planned personal and corporate income tax reductions — is expected to pressure fiscal outcomes,” it said.

As a result of the anticipated increase in borrowing requirements, Moody’s anticipates that net direct and indirect debt may increase to over 150% of revenues over the next four years, from an estimated 106% in 2008-09.

“Even though New Brunswick, similar to that of all Canadian provinces, benefits from a high degree of fiscal flexibility, the province’s long-term financial capacity to service its debt is also conditioned by an economic base that underperforms the national average on a number of growth, income and wealth metrics,” says Sean Marion, assistant vice-president at Moody’s and its’ lead analyst for New Brunswick.

The rating action also reflects Moody’s assessment of the risks associated with New Brunswick Power, which is a contingent liability for the province, and faces higher risks too.

“Despite these challenges, New Brunswick’s credit profile remains firmly in the high investment-grade category. The national operating environment in which New Brunswick operates is strong and suggests a minimal level of systemic economic, financial and political risk. Moreover, the high investment-grade rating remains supported by the high level of fiscal policy flexibility inherent in the institutional framework governing how Canadian provinces operate, which allows provinces to adjust revenues or expenses as required to address challenges,” Moody’s says.

IE