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EnCana natural gas drilling plant in the Horn River basin north of Fort Nelson, B.C.David Ebner for The Globe and Mail

A leading credit-rating agency has sounded the alarm by reducing its outlook on British Columbia's debt to "negative" from "stable" in the latest warning signal on the fiscal health of provincial governments.

Moody's Investors Service cautioned on Wednesday that $39.8-billion of debt securities on the B.C. government's books are at risk of a ratings downgrade because of a softening economy and the province's reliance on natural-gas markets to help boost revenue.

British Columbia's Liberal government originally forecast a $968-million deficit for the 2012-13 fiscal year. Last month, the deficit prediction deepened to nearly $1.5-billion.

As the federal government faces down its deficit battle, in part by holding the line on transfers to the provinces such as health care supports, the effects at the provincial level squeeze funding for education, health and highways, said James Brander, a professor at the Sauder School of Business at the University of British Columbia. "As Ottawa contracts its expenditures, it does place more pressure on the provinces," he said.

Alberta and B.C. are the only two provinces that hold the coveted Aaa rating, also known as triple-A, from Moody's. The federal government enjoys the same top rating, which helps hold down the cost of carrying a deficit. Saskatchewan and Manitoba are on the next rung down, at Aa1, while the remaining six provinces are at Aa2. In April this year, Moody's downgraded Ontario to Aa2 from Aa1.

Despite an uncertain economy, British Columbia has the "fiscal flexibility" to recover, said Jennifer Wong, Moody's assistant vice-president and lead analyst covering B.C. "The negative outlook reflects Moody's assessment of the risks to the province's ability to reverse the recent accumulation in debt with the softened economic outlook, weaker commodity prices and continued expense pressures," Ms. Wong said in a statement.

The B.C. Liberals have tied part of their political fortunes to nurturing the natural-gas industry in the province, but sluggish prices for the commodity have dampened enthusiasm within the energy industry. Companies have vastly scaled back bidding for properties at land sales that had poured hundreds of millions of dollars in the past into B.C. coffers. Excitement over drilling prospects has gradually evaporated, with prices for natural gas in a funk over the past three years. With more supply coming from newly productive shale-gas reserves in the U.S. and Canada, prices show little sign of recovering soon.

Helmut Pastrick, the Vancouver-based chief economist at Central 1 Credit Union, said Moody's has fired a warning shot that British Columbia's current credit rating of Aaa is at risk of being downgraded, unless the government becomes more aggressive in corralling its deficit.

Should the influential agency lower its rating on B.C. debt to the next rung down, Aa1, it would raise the borrowing costs to service the province's debt, Mr. Pastrick said. "Moody's is issuing a warning. If the economy deteriorates, B.C. will lose its triple-A credit rating," he said.

A statement from the B.C. Finance Ministry said the decision by Moody's shows the "growing uncertainty of the global economy and the importance of fiscal prudence in uncertain economic times. It serves as a warning sign to us, and to all economies, to control spending and balance the budget." The ministry added that "this kind of scrutiny, from investors and bond rating agencies, reminds us not to become complacent because economic risk remains."

The sagging fortunes in the natural-gas market come at a bad time for B.C. Premier Christy Clark's Liberal government, which will be hard-pressed to present a balanced budget for the 2013-14 fiscal year, as mandated by law. The B.C. Liberals are under the gun, heading into a provincial election, set for next May, still lagging the New Democratic Party in public-opinion polls.

While the Liberals have traditionally laid claim to being shrewd stewards of the economy, the NDP is considered by political experts to be better suited to handle some of the social challenges facing the province. In a report earlier this week, Toronto-Dominion Bank said British Columbia has the "highest level of income inequality among the provinces," adding that "B.C. ranks first in Canada in terms of individuals living in low income."

Bruce Ralston, the B.C. New Democratic finance critic, said the change in outlook by Moody's underscores the concerns he raised in the spring about the provincial government's overly optimistic expectations for natural-gas revenue. "It is certainly moving in the wrong direction," he said, adding that it will be increasingly difficult for B.C. Finance Minister Mike de Jong "to be taken seriously in his boasts that he is going to be balancing the budget."

With a file from Justine Hunter