Overview

  • The Province of Manitoba delivered better-than-expected financial results in fiscal 2019, strengthening its operating performance and its liquidity position.
  • Strong cost containment is helping to reduce after-capital deficits while the wind-down of large-scale capital projects at Manitoba Hydro should lessen the utility's borrowing needs in the next few years.
  • We are therefore revising our outlook to positive from stable, and affirming our 'A+' long-term issuer credit and senior unsecured debt ratings on Manitoba.
  • The positive outlook reflects the increasing possibility that, in the next two years, the recently re-elected government will continue to make progress toward achieving fiscal balance, although slowing global economic growth could challenge its ability to sustain this positive fiscal momentum.

Rating Action

On Oct. 4, 2019, S&P Global Ratings revised its outlook on the Province of Manitoba to positive from stable. At the same time, S&P Global Ratings affirmed its 'A+' long-term issuer credit and senior unsecured debt ratings, and its 'A-1' short-term issuer credit rating on the province and on Manitoba Hydro-Electric Board's (MHEB) US$500 million commercial paper program, which is unconditionally guaranteed by the province.

Outlook

The positive outlook reflects at least a one-in-three chance that we could raise the long-term ratings by one notch over the next 12 to 24 months, should Manitoba achieve its revenue and expenditure growth targets and manage global economic headwinds, enabling it to post after-capital deficits of less than 5% of total revenues. We would also expect Manitoba's liquidity to remain greater than 80% of debt service costs, and its on-lending to MHEB to trend down with the completion of Bipole III and Keeyask, leading to a declining trend in the province's tax-supported debt ratio.

We could revise the outlook back to stable if, in the next two years, an economic downturn caused Manitoba to miss its revenue targets, or ineffective policy implementation failed to adequately manage expenditures, resulting in weaker budgetary performance, erosion of liquidity to less than 80% of debt service requirements on a sustained basis, or the tax-supported debt ratio continuing to rise beyond fiscal 2022 (year ended March 31).

Rationale

The governing party recently won a second legislative majority, with a pledge to continue its efforts to improve Manitoba's fiscal sustainability. Despite its strong fiscal resolve, Manitoba, like other Canadian provinces, is facing increasingly fragile global economic conditions, which could undermine its revenue growth and require it to re-double its cost control efforts to meet its plan of returning to a balanced budget by fiscal 2023. However, we consider the province's economy to be exceptionally diverse, which should mitigate sector-specific external shocks. We also expect its tax-supported debt ratio to begin to plateau in the next several years, albeit at a very high level.

  • Manitoba is expected to keep progressing toward fiscal balance while the run-up in debt should ease

The fiscal 2019 results show that the government's efforts over the past three years to restructure its cost base in order to control expenditure growth have not been in vain. The province reported an operating deficit of C$163 million for the year, which is a significant improvement from the C$521 million deficit contained in the budget. When first elected in 2016, the government pledged a return to fiscal balance by the end of its second mandate, and its revised medium-term forecast indicates that it expects to meet this goal by the end of fiscal 2023. Under our base-case scenario, we believe that the province's budgetary performance will improve modestly, generating slim operating surpluses (adjusted for material non-cash items) and modest after-capital deficits, averaging almost 5% of total expenditures in the next several years. The government has introduced some tax relief measures, including a one percentage point cut to the provincial sales tax effective July 1, 2019, and did not implement the federal carbon tax, moves that will pressure its revenue growth in the next several years, especially in light of only modest economic growth projections. We believe that this, combined with the ambitious expenditure controls already in place, could limit the province's flexibility to enact further measures to sustain the budgetary performance gains achieved, and stem the growth in its debt burden, in the event of an economic slowdown.

Manitoba's solid budgetary performance in fiscal 2019 helped to increase its cash balances at the end of the fiscal year. We expect that the province will hold total unrestricted cash and liquid investments of almost C$6.7 billion in the next 12 months (including more than C$700 million of discretionary sinking funds and C$1.1 billion of proceeds from MHEB for on-lent debt repayments), equal to about 83% of the estimated gross debt service payable in the next year (including debt service for on-lent debt and repayment of all short-term treasury bills outstanding at the end of fiscal 2019). We do not expect debt service coverage levels to deteriorate significantly despite higher maturities in fiscal 2021. Manitoba also has a demonstrated track record of strong access to Canada's deep capital markets.

The primary constraint on Manitoba's credit profile continues to be its debt burden, which remains the highest of any Canadian province. Our assessment of the province's debt burden fully incorporates the debt on-lent to MHEB, which accounts for more than 40% of total debt. By our estimates, Manitoba's tax-supported debt (including debt on-lent to MHEB) will exceed C$56 billion, or 300% of operating revenues, by fiscal 2022. MHEB has several large-scale capital projects that have recently been completed or are expected to wind down in the next several years. Accordingly, we expect that borrowing on behalf of MHEB, while still significant, will moderate from about 60% of total borrowing on average in fiscal years 2018-2020, to about a third by 2022. We believe that the debt burden, which has risen rapidly over the past 10 years, could begin to plateau in the next several years, provided the province is able to sustain its budgetary momentum. In addition, we believe that MHEB, as a regulated, vertically integrated utility with an effective monopoly position, has the capacity and demonstrated willingness to repay its debt obligations as they become due. Net of on-lent debt to MHEB, the province's debt burden is expected to be around 168% of operating revenues by the end of fiscal 2022. We expect the province's gross interest expense will account for about 11% of operating revenues (6% excluding on-lent debt interest), which is higher than that of similarly rated peers, reflecting Manitoba's larger debt burden.

  • Incumbent government re-elected; expected to remain focused on financial sustainability

After calling an early election held on Sept. 10, 2019, the incumbent Progressive Conservative party, under Premier Brian Pallister, won a second majority mandate. We believe that this eases some of the practical constraints on its ability to enact the revenue and expenditure measures it has laid out to restore the province to fiscal balance. The government has demonstrated its ability to effectively manage its revenues and expenditures to meet or exceed its budget targets in the past several years. The fiscal policy it has outlined continues to focus on controlling expenditure growth and reforming Manitoba's cost structure while also introducing some tax relief for businesses and residents. Our assessment of the province's financial management is also supported by what we view as reliable revenue forecasts, prudent and risk-averse debt management and related policies, and effective cash management and cash-flow planning.

Manitoba is a centrally located province whose almost 1.4 million residents make up only 3.6% of the national population. Its economy remains well diversified and wealthy, with nominal GDP per capita levels close to the national level of about US$46,000. Manitoba's real GDP growth slowed to 1.2% in 2018 after growing 2.5% in 2017. We expect modest growth of about 1.5% in the next several years. Manitoba's broad economy helps to insulate it against sector-specific shocks, although we believe that it remains exposed to risks related to a slowdown in global economic growth, including the growth of its largest trading partner, the U.S.

The ratings benefit from the very predictable and well-balanced institutional framework in which Manitoba operates. The Canadian constitution is the cornerstone of federal-provincial intergovernmental arrangements, which we view as mature and stable. The federal government provides revenue support through a number of agreements and transfer arrangements, including the Canada Health Transfer and Canada Social Transfer payments. For fiscal 2019, these transfers are estimated to account for about a quarter of the provincial adjusted operating revenues. The agreements covering these transfers are long-term, formula-driven, and predictable, but can be subject to change. Typically, the federal and provincial governments discuss proposed changes to transfer programs well ahead of their implementation.

Key Statistics

Table 1

Province of Manitoba -- Selected Indicators
--Year ended March 31--
(Mil. C$) 2017 2018 2019bc 2020bc 2021bc
Operating revenues 16,514 17,404 17,731 18,085 18,586
Operating expenditures 16,296 17,183 17,469 17,633 17,979
Operating balance 218 221 262 453 607
Operating balance (% of operating revenues) 1.3 1.3 1.5 2.5 3.3
Capital revenues 28 10 26 26 25
Capital expenditures 1,123 1,019 1,273 1,237 1,214
Balance after capital accounts (877) (788) (985) (759) (582)
Balance after capital accounts (% of total revenues) (5.3) (4.5) (5.5) (4.2) (3.1)
Debt repaid 2,949 4,543 3,695 4,423 3,606
Gross borrowings 5,284 7,203 5,141 6,327 4,352
Balance after borrowings 1,856 3,297 1,398 2,546 1,111
Direct debt (outstanding at year-end) 46,472 51,710 52,459 55,022 56,447
Direct debt (% of operating revenues) 281.4 297.1 295.9 304.2 303.7
Tax-supported debt (outstanding at year-end) 46,625 51,807 52,657 55,119 56,544
Tax-supported debt (% of consolidated operating revenues) 282.3 297.7 297.0 304.8 304.2
Interest (% of operating revenues) 9.6 10.2 11.3 11.3 11.1
Local GDP per capita (single units) 53,150 53,714 54,970 56,274 57,608
National GDP per capita (single units) 58,607 59,879 60,943 62,586 64,363
The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer. bc--Base case reflects S&P Global Ratings' expectations of the most likely scenario. dc--Downside case represents some but not all aspects of S&P Global Ratings' scenarios that could be consistent with a downgrade. uc—Upside case represents some but not all aspects of S&P Global Ratings’ scenarios that could be consistent with an upgrade.

Ratings Score Snapshot

Table 2

Province of Manitoba
Key rating factors Scores
Institutional framework 2
Economy   1
Financial management    2
Budgetary performance   4
Liquidity     2
Debt burden    4
Stand-alone credit profile a+
Issuer credit rating A+
S&P Global Ratings bases its ratings on non-U.S. local and regional governments (LRGs) on the six main rating factors in this table. In the "Methodology For Rating Local And Regional Governments Outside Of The U.S.," published on July 15, 2019, we explain the steps we follow to derive the global scale foreign currency rating on each LRG. The institutional framework is assessed on a six-point scale: 1 is the strongest and 6 the weakest score. Our assessments of economy, financial management, budgetary performance, liquidity, and debt burden are on a five-point scale, with 1 being the strongest score and 5 the weakest.

Key Sovereign Statistics

Related Criteria

Related Research

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action
To From

Manitoba (Province of)

Issuer Credit Rating A+/Positive/A-1 A+/Stable/A-1
Ratings Affirmed

Manitoba (Province of)

Senior Unsecured A+
Commercial Paper A-1
Commercial Paper A-1(MID)

Manitoba Hydro-Electric Board

Commercial Paper A-1

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Adam J Gillespie, Toronto (1) 416-507-2565;
adam.gillespie@spglobal.com
Secondary Contact:Stephen Ogilvie, Toronto (1) 416-507-2524;
stephen.ogilvie@spglobal.com

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