Even amid commodity price volatility, through prudent budgeting and other steps, resource-rich provinces are in a good position to maintain their credit quality, says Moody’s Investors Service in a new report.
The rating agency says that provinces that generate a significant share of their revenues from natural resources, such as Alberta, Saskatchewan and Newfoundland, “have taken the prudent measures necessary for them to maintain their high level of credit quality despite the prospect of lower prices for these commodities.”
These measures include maintaining robust balance sheets and relatively low debt levels, supported by prudent budgeting, Moody’s says. Additionally, these provinces maintain good communications with natural resource producers, which gives them a clear view of production timetables and helps forecast volumes more accurately when they estimate revenues, it adds.
Alberta, Saskatchewan, and Newfoundland each derive more than 20% of their total revenue from resource-based sources, Moody’s says. Moreover, it notes that strong development in this sector, and high commodity prices, have pushed these shares higher in recent years, supporting budgets and spending programs.
However, the volatility in prices and volumes of natural resources increases the challenges of budget planning, and can result in significant swings in fiscal outcomes, it says. Moreover, it notes that, during the past year, these provinces have indicated that resource revenues are coming in lower than expected; and, commodity prices are not expected to rise significantly over the near term.
“Despite the large reliance on revenue streams from natural resources, which are volatile and a potential credit weakness, the Canadian provinces of Alberta, Saskatchewan and Newfoundland and Labrador remain highly rated because of their use of various mitigating measures,” says Jennifer Wong, Moody’s assistant vice president and analyst.