Sask. credit rating downgraded thanks to weak oil and potash

The provincial government is putting a positive spin on a credit downgrading from the rating agency Standard and Poor’s (S&P).

On Wednesday, S&P downgraded the province’s credit rating to AA from AA+ because of weaker commodity prices and elevated capital spending. Saskatchewan was downgraded from AAA, which is the highest rating, in June 2016.

A lower rating means the province will have to pay more to borrow money.

According to the report from S&P, the downgrade was due to “the province’s weakened budget performance and growing debt burden, which are symptoms of low commodity prices in two of Saskatchewan’s key economic sectors: oil and gas and potash.”

The credit rating agency said the tax reforms and cost control target from the recent budget will help improve the province’s budget outcomes.

However, the agency picked out the Saskatchewan Builds Capital Program as a problem – saying its higher near-term capital spending intentions have helped weaken the province’s budget trajectory. Slower economic growth was also pointed out as a factor in the slower growth.

The Saskatchewan Builds Capital Program is the program which oversees capital spending on infrastructure in the province – things like schools, hospitals, roads and highways.

The report also looked at the province’s debt, saying levels have been increasing at a “meaningful pace” since last year, and in the next two to three years it expects that will continue.

S&P expects Saskatchewan’s budget to be in a negative situation for the next two years, and borrowing requirements tied to SaskBuilds and Crown Corporations to push the tax-supported debt burden to about 150 per cent of consolidated operating revenues – which the agency deems high.

Good news in the short-term

The provincial government focused on the positives in the report.

Standard and Poor’s did affirm Saskatchewan’s A-1+ short-term debt rating – the highest on the scale – and said the province’s outlook is stable.

The agency said it’s expecting Saskatchewan’s budgetary performance to continue stabilizing which will lead to near-balanced operating outcomes.

According to the report, S&P also expects the province’s economy will have some modest real GDP growth in the next two years and that tax-supported debt will stay at more than 120 per cent of operating revenue in the next two years.

“The province’s budgetary flexibility is a key credit strength and is stronger than that of most domestic and international peers,” wrote S&P in its report.

Though it did note flexibility is limited when it comes to how much the province spends because of Saskatchewan’s rising population and health-care responsibilities, and cost measures already undertaken.

In a news release, the province said the stable outlook is a strong endorsement of the revenue measures and spending restraint of the recent provincial budget, in that the report does mention the recent weaker budgetary performance is due to external factors.

“Given the low prices for oil and potash, the province’s high credit rating is recognition of our government’s strong track record of managing the province’s finances,” said the provincial government’s release.

Saskatchewan’s AA long-term rating is the second highest among Canada’s provinces, according to the government, and the province is in a strong financial position compared to the other provinces, with the second lowest debt to GDP ratio in the country, at 20.7 per cent.

In its release, the province reaffirmed its commitment to balancing the budget in 2019-20.