Moody’s downgrades Alberta’s credit rating, citing continued dependence on oil

Alberta’s credit rating has been downgraded by Moody’s, with the agency citing the volatility in the province’s dependence on oil and continued fiscal pressures.

The provinces rating was downgraded to Aa2 stable from Aa1 negative on Tuesday.

The downgrade, the agency states, reflects Moody’s “opinion of a structural weakness in the provincial economy that remains concentrated and dependent on non-renewable resources … and remains pressured by a lack of sufficient pipeline capacity to transport oil efficiently with no near-term expectation of a significant rebound in oil-related investments.”

The agency’s rating stated that continued spending cuts will be needed for the government to balance the budget by its set target of 2022.

“Moody’s notes that the province’s forecast of a cumulative three per cent decline in operating expenses by 2022-23 is somewhat ambitious which will require sustained political discipline,” the release read.

You know, until we can wean ourselves off of royalty revenues to fund government operations, we’re going to be exposed to reports like this anytime oil prices fall.– Trevor Tombe, University of Calgary

“Macroeconomic factors, which influence oil-related revenue growth and private sector investments in the oil sector, remain outside the control of the government. As a result, the government’s fiscal projections are subject to material execution risk.”

Another factor the report outlines as a concern is environmental risk.

“Alberta’s oil and gas sector is carbon intensive and Alberta’s greenhouse gas emissions are the highest among provinces. Alberta is also susceptible to natural disasters including wildfires and floods which could lead to significant mitigation costs by the province,” the report states.

Alberta Finance Minister Travis Toews said he was disappointed by the rating, which he blamed on the previous government.

“This decision shows how previous governments’ fiscal mismanagement and inability to gain market access for Alberta’s energy continues to affect our province,” he said in an emailed release.

Toews noted that the agency did give the province a stable outlook, and said since the release of the province’s budget in October many economists and financial institutions have signalled that the budget is “getting our province back on track.”

Corporate tax cut will pressure revenues: Moody’s

The Official Opposition fired back, pointing to factors in Moody’s rating such as the statement that the province’s cut to corporate income tax rates and the elimination of the carbon tax will put pressure on revenues, and that the province’s debt burden will be stabilizing at a higher burden than forecasted.

“The UCP debt is virtually the same as the NDP, but the difference is the UCP blew a hole in the budget, has no diversification plan, has presided over thousands of job losses with no end in sight,” NDP finance critic Shannon Phillips said in an emailed release.

Trevor Tombe, an associate professor of economics at the University of Calgary, said the downgrade is pretty consistent in its assessment of Alberta’s risk due to the importance of the oil and gas sector to the province’s budget.

“You know, until we can wean ourselves off of royalty revenues to fund government operations, we’re going to be exposed to reports like this anytime oil prices fall,” he said.

But, he said the agency’s biggest concern seems to be the province’s path to future debt and balance.

“Debt levels will continue to be rising even when we balance the books in 2022-23. So just balancing on the operating side does not itself mean that we won’t continue to accumulate debt because things like capital projects affect debt levels even though it doesn’t directly count as an expense,” he said.

Moody’s also downgraded the long-term debt ratings of the Alberta Capital Finance Authority and the long-term issuer rating of ATB Financial to Aa2 from Aa1.