Nunavut scores high credit in first-ever credit report
“An important step in the GN’s fiscal development”
The credit rating agency Moody’s Investors Service has produced the Government of Nunavut first-ever credit report, giving the territorial government the second highest possible score in a 21-step ranking system.
Moody’s gave Nunavut an AA1, or “stable” rating, Aug. 21, which means Nunavut “provides a stable, predictable source of revenue,” a Moody’s press release said.
The GN hired Moody’s to assess Nunavut’s financial stability and produce a credit rating, which is described as a “report card grade that shows how likely it is than an organization will repay its debts.”
“Receiving this credit rating marks an important step in the GN’s fiscal development,” Nunavut finance minister Keith Peterson said in an Aug. 21 news release.
This also gives a fair comparison with other Canadian jurisdictions, and helps smooth the way for more public-private partnerships by instilling confidence within private companies and investors.
The Northwest Territories and Ontario are rated the same as Nunavut at AA1, whereas Quebec has a lower rating than Nunavut, at AA2. British Columbia has the highest possible rating at AAA.
“We are committed to strengthening our fiscal management practices and policies as we develop our self-reliance,” Peterson said.
The GN thinks the rating will help the government borrow money at cheaper interest rates.
This, however, does not change the amount of long-term debt that Nunavut can carry at any given time. The territory’s debt cap, raised recently by the federal government, is now $400-million.
Moody’s described Nunavut’s debt, which is measured at 11.8 per cent of total revenues as of March 31, 2011, as “modest” but is expecting that ratio will rise as a number of infrastructure projects go forward.
Moody’s also praised Nunavut for good fiscal management practices that produce surpluses, a low debt burden, and stable revenue, as well as stable revenue streams from the federal government that give the territory predictable revenues each year.
Nunavut will receive $1.3 billion in transfers from the federal government in 2012-2013 — nearly all of its budget.
These transfer payments play an important role in the AA1 ranking because Nunavut’s own-source revenue, mostly based on taxes, is described as “volatile” by Moody’s.
Moody’s also criticized how the federal government collects natural resource royalties for Nunavut.
“As Nunavut’s economic potential is tied to natural resources, Nunavut will need to rely on other methods of collecting revenue from this sector, such as the existing payroll tax, to generate higher own-source revenue over time,” the Moody’s news release stated.
The higher cost of delivering programs in Nunavut is also a negative, according to Moody’s.
“Nunavut’s small population and geographical conditions add fiscal challenges not seen in Canadian provinces, but the rating reflects the strengths from the institutional framework and commitment to budgetary balance,” the assistant vice-president analyst at Moody’s Canada Inc., Michael Yake, said in the Aug. 21 press release.
“Given the higher costs of delivering services in the north, Nunavut faces slightly more rigid expenditures than seen in the provinces. With changes to federal funding formulas, it will be important for Nunavut to remain vigilant on cost controls given their low level of own-source revenue,” he said.
The GN agrees that these constraints, make it “harder for the GN to meet its financial obligations” and that “these points simply reflect the realities of operating a government in Nunavut, and will likely be true of the GN for many years to come.”
Moody’s determined its rating based on a number qualitative and quantitative factors, including:
• financial performance;
• existing debt levels;
• sources of revenue;
• laws, regulations and policy that guide spending decisions;
• current global financial and economic climates;
• strengths and weaknesses of Nunavut’s economy;
• relationship with the Government of Canada;
• discussions with the GN officials; and,
• analysis on GN budget documents and financial statements.
The rating can go up or down in the future based on the economy and Nunavut’s own-source revenue, or a reduction in federal transfer payments.
However, in the “medium-term” Moody’s said a change is unlikely.