Alberta’s financial standing downgraded by credit-rating firm due to COVID-19, oil prices

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A major debt-rating agency has downgraded Alberta’s credit worthiness and warned that should the province’s recovery drag on without “fiscal measures” to stabilize government coffers, further downgrades could be on the horizon.

S&P Global, the credit-rating firm, said the coronavirus pandemic hurt Alberta’s financial position more than the agency expected. This, coupled with a slump in oil prices that started in 2014, prompted the firm to downgrade the province as Alberta’s debt increased and its deficit ballooned.

Premier Jason Kenney came to power on the promise of restoring Alberta’s economy. This was derailed as oil prices continued to languish, the government shied away from increasing taxes, and the pandemic expenses piled high. Because of the twin blows of slumping oil prices and COVID-19, Alberta may not recover as quickly as other jurisdictions in Canada, S&P said.

“The downgrade is the culmination of the two powerful economic shocks that Alberta has endured in the past six years,” S&P analyst Stephen Ogilvie said in a note. Alberta’s outlook remained “stable,” based on the agency’s expectation that the economy will grow and Alberta’s books will improve over the coming years.

However, S&P may change its outlook to “negative” and further downgrade the province’s credit rating if the recovery takes longer than expected, deficits remain significant and Alberta lacks “timely responses by the government to implement new fiscal measures intended to restore fiscal sustainability,” Mr. Ogilvie said. He added Alberta has not established a timeline to balance the budget.

“The fiscal recovery will rely on economic growth and continuing strict expenditure management to do much of the heavy lifting, and these efforts can often take longer than expected to come to fruition and might not fully address the imbalance between revenues and expenditures,” he said.

Travis Toews, Alberta’s Finance Minister, in a statement said that while a credit downgrade is “unwelcome” news, he does not expect S&P’s revision to hurt the province’s ability to borrow money.

“Alberta has an excellent reputation and track record in the capital markets and we expect that to continue,” he said, adding other governments have faced similar ratings downgrades during the pandemic.

“Over the long term, the government’s commitment to economic recovery and responsible fiscal management will help Alberta improve its financial standing,” Mr. Toews said.

S&P calculates Alberta’s after-capital deficits will average more than 25 per cent of total revenue during the fiscal years 2021, 2022, 2023 and 2024. The provincial debt will reach almost $150-billion, or 305 per cent of operating revenue, by the end of fiscal 2023-24, the agency said. This is up from 205 per cent of operating revenue at the end of fiscal 2019-20, when the pandemic started, according to S&P.

The firm believes prospects for the oil industry have improved, which is to Alberta’s benefit. However, this comes as the International Energy Agency on Tuesday said investment in new oil and gas projects must stop now in order to meet the global emissions goals and blunt climate change.

Sara Hastings-Simon, a research fellow at the University of Calgary’s school of public policy, said the IEA’s report and S&P downgrade together reinforce the need for Alberta to plan for a future with declining demand for oil and gas.

“I think it is a little bit of a wake-up call,” she said. “It’s not too late.”

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