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N.W.T. credit rating under pressure from pandemic, declining diamond industry

The review by Moody's does not announce any changes to the territory’s Aa1 rating and is not an indication of whether or not a credit rating action is likely in the near future. But it does lay out a number of factors pressuring the territory.

Moody’s releases periodic review of N.W.T.’s credit rating

An aerial view of the Ekati diamond mine, 300 kilometres northeast of Yellowknife. The COVID-19 pandemic has hit the diamond industry particularly hard, and that's putting pressure on the N.W.T.'s credit rating, according to a review released Wednesday. (Dominion Diamond Corporation)

The coronavirus pandemic, an aging population and a declining diamond industry is pressuring the Northwest Territories' credit rating, according to a periodic review published Wednesday by credit ratings agency Moody's Investors Service.

The territory has maintained an Aa1 credit rating — Moody's second highest — since 2006, reflecting substantial and predictable fiscal transfers from the federal government and a well-developed fiscal framework that supports the territory's ability to post operating surpluses, according to the review.

The surpluses have taken a hit though.

Moody's successfully predicted in February that there was a significant risk the N.W.T.'s projected surplus of $203 million for the current fiscal year would be lower. That was prior to the World Health Organization declaring the coronavirus outbreak a pandemic. The territory has since revised the figure to $121 million.

At the same time, Moody's also said the Northwest Territories' budget projections of rising debt levels and relatively weak economic growth highlight its continued credit challenges.

In June, the Conference Board of Canada predicted the N.W.T.'s economy will contract by 3.3 per cent in 2020, but it expects growth will bounce back next year to 3.9 per cent.

Credit rating unchanged

Wednesday's review did not announce any changes to the territory's credit rating and Moody's says it is not an indication of whether it will change in the future. But it does lay out a number of factors pressuring the territory.

"The rating is pressured by limited own-source revenues, an aging population that will put upward pressure on health expenditures, and a narrow economic base concentrated mainly in a mature and declining diamond industry," it says.  

The diamond industry has been hit particularly hard during the pandemic.

"The diamond industry has received a couple of lifelines recently but it's not doing well," said Adam Hardi, a Toronto-based analyst with Moody's.

"It will disappear after a decade or a number of years, which means the territory will be even more reliable on federal support."

Hardi says because the territory relies quite heavily on federal support, it's one of the key credit elements Moody's considers when discussing the N.W.T.'s rating.

He also notes that while the pandemic brings a level of uncertainty, there have been very few COVID-19 cases in the territory, meaning there's less spending required compared to other Canadian jurisdictions.

The pandemic factor

The executive director of the NWT Chamber of Commerce cautioned the full scale of the pandemic is not yet known.

"The full effects of the downward turn of the economy due to COVID-19 across all private sectors will not be realized until the end of the year," Renee Comeau wrote in a statement to CBC News.

"Though as an economy we have not seen the mass layoffs and shut downs that have been experienced down south, private industry is very much feeling the negative effects of COVID[-19] as well as a contracting economy."

In a press release Wednesday, the territory's finance minister called Moody's credit review a "positive reflection" on the government's ability to responsibly manage its budget and expenditures.

"While COVID-19 has led to additional costs, the [government of the Northwest Territories] is working hard to ensure that our finances are sustainable and we are implementing a multi-year plan to improve our financial position," wrote Caroline Wawzonek.

"I look forward to engaging with residents over the next few weeks to get their input on how best to position the [government of the Northwest Territories'] budgeting priorities in light of the impacts the response to COVID-19 has had on our territory."

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