News Column

Fitch Affirms Province of Saskatchewan at 'AA'; Outlook Stable

May 22, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the following ratings of the Province of Saskatchewan, Canada (the province):

--Foreign and local currency long-term IDR at 'AA';

--Short-term IDR at 'F1+';

--Senior unsecured long-term debt at 'AA'.

The Rating Outlook on the long-term ratings is Stable.

SECURITY

Senior, unsecured obligations of the Province of Saskatchewan, Canada.

KEY RATING DRIVERS

MANAGEABLE DEBT DESPITE CYCLICAL REVENUES: The rating is based on the province's sound fiscal management. The province has generally balanced operations and a sizable reserve cushion on a core operations basis enabling it to reduce and maintain a lower burden of debt for governmental general purposes. The province has demonstrated a commitment to maintaining fiscal balance despite exposure to cyclical economic and revenue trends.

STRONG MANAGEMENT OF RESOURCES: Provincial revenues are diverse, although the sizable natural resource-related component is volatile and vulnerable to global resource trends.

CONSERVATIVE FISCAL MANAGEMENT: Fiscal management is prudent, with reasonable forecast economic projections and balanced operations projected for fiscal 2015 and through the forecast period. The province continues to maintain a large fiscal cushion in the growth and financial security fund (GFSF), a key factor in supporting the rating.

VULNERABILITY TO RESOURCE ECONOMY: Economic growth was initially very strong following the recession and continues despite some recent potash-related volatility. The province remains vulnerable to global commodity trends. Population growth and economic diversification continue to expand the province's economic profile.

RATING SENSITIVITIES

CONTINUED RESERVE GROWTH: Additional growth in reserves in the context of ongoing careful fiscal and debt management would further offset resource-related volatility and could lead to a rating upgrade.

SEVERE VOLATILITY AND RESERVE DEPLETION: Unexpectedly severe economic and revenue volatility beyond the cushion provided by existing balances could lead to a rating downgrade.

CREDIT PROFILE

The province's 'AA' long-term rating is based on its demonstrated commitment to maintaining fiscal equilibrium despite the cyclicality inherent in its economy and revenue profile. Past action to direct resource revenue-related surpluses to reduce debt and build reserve balance has yielded ongoing fiscal benefits. As such, the province has an affordable burden of liabilities and maintains a sizable fiscal reserve in the form of the GFSF, a reserve established in 2009 to cushion against fiscal shocks and provide resources for economic development. Economic growth and diversification continues, albeit more slowly than in recent years.

ECONOMIC GROWTH CONTINUES

The province's economy has grown rapidly over the last decade, in spite of commodity-related volatility arising from its globally important agriculture and mining sectors. Although employment growth slowed with the recession in 2010 and 2011, gains thereafter were significantly ahead of Canada's.

Employment rose 2.1% and 3.4% in 2012 and 2013, respectively, compared to 1.2% and 1.3% for Canada overall. More recent job growth has slowed but continued, with April 2014 employment up 0.5%, compared to 0.8% for Canada. Unemployment rates in the province are consistently below that of the nation, with the 3.4% rate for April 2014 less than half of the 6.9% national rate.

Economic gains have brought steady population growth to the province in recent years, with 2013 population topping 1.1 million (up from 996,000 in 1996). The province expects population to reach 1.2 million by 2020.

Real GDP rose 4.1% in 2013, with the province benefiting from a historically strong grain harvest. Although inherently volatile, the economic trends affecting each of the province's commodity sectors are not necessarily synchronized, with disparate economic and fiscal impacts on the province. For example, the benefits of 2013's strong agricultural harvest were partly offset by uncertainty and price declines in the potash sector, which were the result of market factors far beyond Canada's borders.

The economic forecast underlying the FY 2015 budget, tabled in March 2014, appears reasonable. Real GDP is forecast to grow at 2.2% in 2014 and 2.3% in 2015 and maintain a similar pace thereafter. Commodity prices for oil, potash and wheat are forecast to fall in 2014 from higher 2013 actual levels, with gradual increases for most prices in 2015 and beyond. The exchange rate for the US dollar, destination for much of the province's resource exports, is forecast to drop to C$0.90 in 2015, from the C$0.97 in 2013, remaining relatively stable thereafter.

PROVINCE MAINTAINING FISCAL BALANCE

The province has a disciplined approach to financial management. The province has generally balanced annual operations and a history of setting aside resource-related revenue windfalls to cushion volatility, for capital needs, and to reduce debt. This has enabled it to lower debt ratios materially following the 2008-2009 resource boom. As such, the province has virtually eliminated the accumulated deficit of core operations (formerly the general revenue fund, or GRF) and building a substantial accumulated surplus from a wider summary financial statements (SFS) perspective.

The FY 2015 budget, tabled in March, estimates that FY 2014 ended in balance on a core operations basis, although not without a small draw from the GFSF. Own-source revenues were 1.4% below the FY 2014 budget plan, the result primarily of a sizable variance in potash receipts. The variance offset the small, C$64.8 million net operations surplus originally budgeted, yielding instead a C$127.8 million deficit which was closed by a C$135 million draw from the GFSF. On an SFS basis, by contrast, FY 2014 ended with a sizable C$591 million net operating surplus, well ahead of plan, the result of unexpected gains from crop insurance, among other factors.

The FY 2015 core operations budget is restrained, with own-source revenue growth of 3.3%, while spending rises only 1.2%. The plan foresees a net operations surplus of C$105.4 million at year-end, before GFSF transfers. The GFSF is forecast to end at C$584 million, equal to 5.7% of own source revenues.

In a change from past practice, the FY 2015 tabled budget shifts emphasis to the SFS perspective, to better align the budgetary presentation to auditor recommendations. The FY 2015 SFS budget is forecast to be in balance, with revenues of C$14.1 billion offset by expenses of C$14 billion. SFS own source revenues are virtually flat, while expenses rise only 1.5%. The year ends with a small surplus of C$71.4 million.

DEBT LIABILITIES MANAGEABLE

The debt obligations of the province have become more manageable over time as past actions to lower outstanding debt and the government's emphasis on budgetary balance have reduced the need for borrowing. Public debt on an SFS basis, including government general and business enterprise debt and nets out sinking fund equity, has risen over time. This is driven by Crown corporation component, even as the balance of government general debt fell from C$6.8 billion in fiscal 2008 to C$3.8 billion in FY 2012, the level at which it is projected to remain through FY 2015.

Public debt as a share of GDP, as high as 20% of GDP in FY 2008, is forecast at 14.2% in FY 2015. Debt service for government and crown corporation debt totals a manageable 3.9% of SFS expenses, down from 8.3% as of FY 2008.

Net liabilities to retirees for several closed defined benefit plans are substantial, at C$7.1 billion in FY 2015, but actuarial assumptions are conservative and employer expenses are manageable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'International Local and Regional Governments Rating Criteria, Outside the United States' (April 23, 2014).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

International Local and Regional Governments Rating Criteria - Outside the United States

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719656

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831342

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Douglas Offerman

Senior Director

+1-212-908-0889

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Karen Krop

Senior Director

+1-212-908-0661

or

Committee Chairperson

Laura Porter

Managing Director

+1-212-908-0575

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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