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Credit rating agency finds GN in solid position to manage fiscal performance

View that the Territory’s fiscal performance is likely to remain manageable and the debt burden low
A credit agency report from earlier this month notes that the GN’s recent capital expenditure program could result in more spending, though the territory has historically underspent on its budget. Black Press Media file photo

The Government of Nunavut has been confirmed at a AA user rating by DBRS Limited, keeping the territorial government at a stable, positive trend.

“The territory’s fiscal performance is likely to remain manageable and the debt burden low,” despite a weak underlying economy, the credit rating agency, also known as DBRS Morningstar, stated in a report earlier this month.

“For 2023–24, Nunavut’s consolidated budget forecasts a surplus of $96.9 million. DBRS Morningstar makes adjustments to recognize capital spending as incurred rather than as amortized. This equates to a DBRS Morningstar-adjusted surplus of $38.3 million, or less than one per cent of GDP (gross domestic product).” Budget forecasts predict “ongoing modest surpluses,” subject to change in upcoming years.

The report also notes that the recent capital expenditure program could result in more spending, though the GN has historically underspent on its budget.

“DBRS Morningstar expects Nunavut’s track record of strong fiscal performance, ample liquidity, and reliable federal funding will leave it well positioned to respond to challenges, including the high cost of program delivery and broader economic uncertainty.”

With a low and decreasing debt level since March 31, 2023, when the adjusted debt rate declined by 4.5 per cent from 2022 to $399 million, this has resulted in a debt-to-GDP ratio of 8.4 per cent. If the government continues with this trend for the next three to five years, the projection is that Nunavut’s debt-to-GDP ratio will dip below 5 per cent due to high liquidity and external borrowing.

“Given the strong institutional framework, low debt burden and capacity to afford additional debt financing, there is ample room within the assigned credit rating to withstand an increase in debt,” reads the report.

Economic forecasts are based on the 2023 Conference Board of Canada’s projections and used by the territorial government for planning. Real GDP growth is expected to be 9.9 per cent and nominal GDP growth is projected to reach 13.6 per cent. Positive economic output will continue to be contingent upon commodity prices, completion of capital projects and future developments in the resource sector, in addition to fluctuations in government spending. Other factors, such as the rising cost of living, fluctuating commodity prices and “concerns about weakening global macroeconomic conditions could limit growth potential through 2024,” according to DBRS Limited.

In sum, Nunavut is in a good financial position in its current credit rating category. A decline in the credit rating could result in in a weakened institutional framework, whereas a continued positive trend would result in increased economic diversification, broadening the tax base and sustaining strong fiscal performance.