The Government of Saskatchewan will have to dig a bit further in its wallet to service its debts for the next little while after credit rating agency Moody’s downgraded the province.
The agency recently moved the province from the highest rating, AAA, to AA+ in the next-highest tier.
Moody’s pointed to multi-year budget deficits, rising debt and higher capital spending. In the spring budget, the province announced it would take two years longer to get back to balance than originally projected; that was also cited as a reason for the rating downgrade.
The agency’s release noted government revenue is expected to gradually improve but higher spending is also expected.
“The higher spending reflects elevated pandemic-related expenses and economic stimulus, including rising health and social spending, which in Moody’s view will be challenging to significantly reduce,” read the release.
Moody’s also talked about the government’s projections for oil prices over the next year being on the higher side of its own projections.
The province’s outlook, according to Moody’s, was upgraded to stable, and the agency said the rating could be upgraded in time if the province could “significantly reduce its deficits and accelerate its fiscal recovery while at the same time reduce its debt burden and improve its liquidity to pre-pandemic levels.”
What does this mean?
“All those deficits and debts that we run or maintain, they’re going to cost us a little bit more every year to service, so that’s the biggest implication,” Jason Childs, associate professor of economics at the University of Regina, explained.
Childs said the downgrade isn’t a massive change as the gap between AAA and AA+ isn’t all that big.
“Now, if we get hit by a bunch of inflation and interest rates start to track up because of the inflation, that gap can widen,” warned Childs.
The change won’t affect the entirety of the debt the province has already accrued, according to Childs. It’ll affect the province going out and trying to sell new bonds and any elements of the current debt that need to be rolled out.
Childs said it surprised him that, in Moody’s reasoning, the agency didn’t talk about inflation or exchange rates which, if there are big enough changes, could mean a large amount of cash.
At the path the province is currently on, Childs believes it’s likely the credit rating will stay where it is. He did warn that if government keeps spending more than it’s bringing in, then the downgrades could continue.
Calling for a full accounting
The Opposition NDP wants to know just how much this downgrade will cost the province.
Finance Critic Trent Wotherspoon has sent a letter to the finance minister on the topic, claiming the downgrade was because of financial mismanagement.
“The Sask. Party needs to tell the people of our province how much their record of mismanaged projects, corrupt deals and outsourcing jobs is going to cost, and how the Sask. Party plans on making people pay — whether through cuts to services, sale of Crown corporations or public assets, tax increases, or even more debt and deficits,” Wotherspoon wrote in a news release.
The NDP also noted Saskatchewan’s credit rating was also downgraded by Standard & Poor’s in 2017 and by DBRS Morningstar in 2020.
On the other hand, the government is attributing the downgrade to economic challenges presented by the pandemic. It noted in an emailed response that Saskatchewan has the lowest net debt-to-GDP ratio in the country, and claims its 2021-22 budget carefully manages spending.
The government also said it is pleased Moody’s changed the province’s outlook to stable.
“Our government’s fiscal approach through the pandemic has positioned our economy for significant growth in the months ahead as life gets back to normal, and we believe the people of Saskatchewan can look to the future with confidence,” read the response.