'No reason for alarm': Muskrat costs cited as big factor in N.L. credit rating downgrade
Province's 'elevated debt' and $12.7B cost of hydro project raises concerns for rating agency
Newfoundland and Labrador's finance minister says a downgrading of the province's credit rating is "not a reason for alarm," and he expects the province will continue to be able to borrow money at reasonable rates.
"This is not a significant downgrade. Our lenders are telling us this is nothing to be alarmed with," Tom Osborne told reporters in St. John's on Thursday.
Osborne was reacting to news earlier in the day that the credit rating agency Moody's had lowered the province's rating to A1 stable, from AA3 negative.
That's among the lowest in the country, but is still higher than the bond ratings the province received in 2005 and earlier, said Osborne.
Our lenders were not at all surprised by this.- Tom Osborne
Two other rating agencies are expected to deliver their verdicts in the coming weeks, and Osborne said he'll get a better picture then if the province's borrowing costs will escalate.
"Our lenders were not at all surprised by this, and there has been no strange or awkward reaction from our lenders," Osborne said.
Moody's cited the province's heavy debt load, a long-shot plan to end a painful series of annual deficits, and the massive cost of the Muskrat Falls hydroelectric project as reasons for the downgrade.
'Heightened credit risk'
Using phrases like "heightened credit risk" and referring to the "weak financial metrics" of Nalcor, the province's wholly owned energy corporation, Moody's delivered a scathing assessment of the province's fragile financial position.
The province's ambitious path to financial stability, which includes a return to balanced budgets by 2022-23, was also questioned by Moody's, because it relies on annual expenditure cuts of more than seven per cent.
Moody's described the target as "highly ambitious" for any Canadian province.
When challenged about Moody's skepticism, Osborne refused to say whether the Liberal minority government could deliver on this pledge, or whether deep spending cuts would be made in order to make it happen.
He kept using the phrase "balanced approach."
"Nobody has said that this is going to be easy, and it's not," he said, adding, "We will continue to adhere to our budget plan and focus on what needs to be done."
In recent years, government spending has been outpacing revenue by roughly $1 billion, and though spending has stabilized, a serious gap remains.
The provincial government's plans to reduce the size of the public service through attrition have also failed to realize any significant savings, and lower oil prices are taking a bite out of a cash flow that once helped stuff the province's coffers.
If I could magically make Muskrat Falls disappear as though it had never happened, our province today would be in very strong shape.- Tom Osborne
And any cost-cutting has been gobbled up by higher debt-servicing costs, related mostly to the Muskrat Falls project.
Debt payments, at roughly $1 billion annually, are now the province's second-largest expenditure, behind health care.
"If I could magically make Muskrat Falls disappear as though it had never happened, our province today would be in very strong shape," said Osborne.
Calling for co-operation
Osborne said Moody's expressed concern about the minority government situation, and he used the downgrade as an opportunity to call for co-operation.
"I am putting in a formal call for all members of the legislature to work with us, as opposed to putting unrealistic demands and expectations that would have seen a further downgrade today if we had put in spending measures to the tune of hundreds of millions of dollars," he said.
NDP Leader Alison Coffin said her party, which holds the balance of power in the legislature, will focus on non-monetary issues "for now."
But in future years, she plans to push for changes more in line with her party's platform.
"We think there is lots of opportunity to make different decisions on our spending that would improve everyone's lives and not put us in a deficit situation or not continue to increase our debt," she said.
As for the PCs, finance critic Tony Wakeham accused the Liberals of failing to take any action to address what he called the "expenditure problem."
"I will support this government, but not in the fiscal framework they are putting forward. They need to show and prove to the people of this province that they can manage the finances, but they haven't shown that yet," he said.
Wakeham said the Liberals continually refuse to disclose their plan to return the province to fiscal stability, and said that's no way to muster unity in the legislature.
"It's hard to work with someone when they won't share the numbers with you in their own fiscal forecast. Until we get them we don't know if they're real or fictional," he added.
Newfoundland and Labrador, according to Moody's, has the highest interest expense of any Canadian province, at nearly 13 per cent of revenues as of March. This figure is expected to grow to nearly 15 per cent within three years, which will intensify budget pressure and efforts to stabilize an alarming financial outlook.
Dependence on volatile royalties
Adding to the concern is the province's dependency on royalties from volatile natural resources such as oil and gas and minerals.
"The volatility hampers long-term planning … and is an intrinsic credit negative of the province," says the statement from Moody's.
Financial advisor Larry Short, meanwhile, was not surprised by Moody's announcement.
"Any household, any person, any province that is spending $8 billion but only taking in $7 billion, that spells that we are going to be continue to be downgraded until we do something significant to cut our expenses or increase that revenue," he told CBC News.
Short said the province's only hope is to cut spending deeply, or hope for a significant increase in revenue. He said the government's plan to rein in the deficit is unrealistic because it has not been cutting costs.
The province is also facing a serious problem with emigration, and its population is aging faster than any other jurisdiction in the country.
Nalcor's financial noose
Meanwhile, the Muskrat Falls project now accounts for 30 per cent of the province's net debt, and threatens to send electricity rates soaring when it rates full commercial power in two years.
But Premier Dwight Ball has promised that taxpayers and electricity users will not be burdened with the project's massive cost and schedule overruns.
This has raised concerns for the rating agency, because of Nalcor's "weak financial health" and the possibility that the government may have to assume some of Nalcor's debt and provide "direct provincial support" to keep power rates stable.
The province's rate stabilization plan "fails to alleviate Moody's concerns over Nalcor's financial health," states the agency.
"Should rate mitigation efforts not succeed, either the province would have to offer support to Nalcor, or electricity rates would need to rise, which would hinder economic activity across the province. Both of these outcomes would be credit negative."
But Osborne said keeping electricity rates stable is worth the risk.
"We need to ensure people can afford to live here," he said.